A Retail Investor's Guide to Clean Energy

Daibik Chakraborty
April 5, 2021

Disclaimer: The content of this article is not written by a financial advisor, nor is it meant to be financial advice. The content of the article is for educational purposes only.

Clean Energy Impact Analysis and Investment Thesis

For most of the 20th century, the United States heavily relied on fossil fuels for industrialization and the expansion of society. Fossil fuels made for a relatively inexpensive mode of generating electricity to help power manufacturing, heating, and light. The transition to clean energy finds its roots in the 1970s when environmentalists warned about the eventual depletion of oil and other fossil fuel resources during the global energy crisis. This decade observed an invigorated interest in environmental protection and movement towards alternative energy resources, with the establishment of the Environmental Protection Agency, the passing of the Public Utility Regulatory Act to promote fuel diversity, and the implementation of the world’s first wind farm in New Hampshire.

In the following decades, there was a growing awareness of the threats of climate change posed on society. Attention towards pollution and carbon emissions started becoming the forefront of energy transition conversations. Governments began regulating carbon emissions via cap-and-trade policies or carbon taxes. By the turn of the 21st century, the importance placed on leveraging solar, wind, and hydro energy climbed rapidly.

The wide-scale implementation of clean energy technology is expected to have three benefits that the fossil-fuel-driven energy market has stagnated upon economic development, price stability, and energy security. When observing the clean energy market through an economic development lens, we see that the industry is more labor-intensive than the fossil fuel industry, meaning more jobs. Price security related to economic development as clean energy investments in areas such as solar or wind will not entail massive transportation or fuel costs to sustain the creation of power. Energy security will be strengthened by the fact that a transition to clean energy will produce a reduced risk of oil spills, decrease international dependence on fuel, and diversify the United States’ pool of energy resources.

The most influential force of innovation for the transition to clean energy has been and will continue to be, the private sector. There has been vested interest by both government and institutional investors to boost research and development in cleantech to catalyze the transition to an energy grid that is efficient, clean, and durable. Since 2008, the share of the global energy market for additions to power generation capacity has been overtaken by cleantech. in 2018 alone, 181 Gigawatts of renewable capacity had been installed. Over one-third of the world’s power generating capacity now comes from clean resources. The drive towards investment in clean energy has also had an effect on the world’s political economy; over 11 million jobs worldwide have been created in this sector and are only increasing at a rapid rate. As of 2019, clean energy technology, worldwide, reached the capacity to produce 2713.60 Gigawatts of renewable energy and is expected to reach 4391.18 Gigawatts by 2026. For comparison, 4400 Gigawatts of power can run almost 2200 Hoover Dams. Currently, 167 Gigawatts of renewable energy generation are operational for the creation of electricity.

In the United States, 29 states have clean energy portfolios that ascertain a certain amount of power consumption in the state must come from renewable resources. The country as a whole will be responsible for generating up to 24.4 Gigawatts of power alone in 2021. In 2020, the United States invested north of $50 billion into research, development, and commercialization of clean energy and renewable technology. Worldwide, over 100 individual cities are powered by at least 70% clean energy and renewable technology.

There is a clear and present mandate in the transition to alternative energy systems which will lead to a long-term overhaul of the fossil-fuel-driven economy in the status quo. As the attention towards climate change taking front stage among the general population, coupled with an increasing demand for energy, countries as a whole are compelled to transition to a sustainable and clean system. Clean energy makes for a viable retail investment choice, not only for the sector’s bright future and anticipated exponential growth, but also as a means of distributing resources to innovation that will, in the end, promote a clean, durable, and affordable energy grid capable of sustaining the growing demands of an expanding population.

Administration Goals

The central government of any country tends to be the standard-bearer of its state’s ambitions for a renewable future. As is the case for the United States. The responsibility for the future of clean energy has largely been taken up by the new White House administration, and there is importance in understanding its goals in order to comprehend the direction of the energy market and how Americans can expect energy infrastructure to change in the coming decades.

The Biden Administration has imposed lofty goals to ensure that the United States can meet the challenge the climate crisis provides while empowering American workers and businesses to promote the clean energy revolution. The main thesis of the administration’s plan is to leverage the clean energy industry to set course on a path to a net-zero carbon economy by 2050. Pursuing such actions to advance these goals will require promoting talents in the private sector, fostering determination, and driving innovation of American workers to create a more robust energy sector.

Within the first few weeks of the installment, the Biden administration has set in stone expansive objectives to set a precedent for its ambitions. Primarily, the administration plans on putting the country on a path to net-zero carbon by requiring polluters to consume the costs of carbon pollution, developing fuel economy standards that require light and medium-duty motor vehicles to transmit zero emissions, and phase out drilling for oil on federal lands. Secondly, the administration looks forward to investing $400 billion over the course of 10 years to promote private-public partnerships to boost innovation in the clean energy sector to aid in decreasing the United State’s carbon footprint. A part of the funding will go towards establishing a federal research agency, ARPA-C, to foster the advancement of robust climate technologies. Tertiarily, the administration hopes to be able to disseminate new climate technology to municipalities in order to update the country’s energy infrastructure. Such modernizations will include appliance retrofitting and electrification, 500,000 new vehicle charging outlets by 2030, as well as clean on-site power generation.

Disruptive Industries & Technologies

Although the United States Federal Government will be responsible for agenda-setting, the private sector will be largely responsible for the innovation and commercialization of clean energy technology. The movement behind the clean energy revolution has made way for new industries to boom, such as carbon capture technology, and existing industries to expand, such as the motor industry dabbling in the electric vehicle market. While it is still premature to judge when certain sectors of the energy market will become staple forces of the future economy if at all, analyzing disruptive technologies gaining traction within the clean energy movement can make for an informed course of action when looking to invest in this dynamic market.

Green Hydrogen: Green Hydrogen technology has only recently caught the attention of major world governments. Currently, hydrogen is extracted via chemical processes that leave behind vast amounts of methane. However, strive is being made towards expanding technology that involves electrifying water molecules (H20) to break apart hydrogen from the oxygen atoms. Instead of methane, green hydrogen leaves behind water. This form of hydrogen will be a driving force of the electric vehicle market as many automakers are shifting to technology that produces less output in their vehicles. While the technology for H2O electrolysis is expensive with relatively low output, the market for green hydrogen is expanding. As of 2020, the market is sitting at a $786.9 million market capitalization with an expected compounded annual growth rate of 14% from 2020-2027. Notable publicly traded companies currently operating in this market include:

  • Plug Power (PLUG) – Plug Power is the leading provider of clean hydrogen and will be finishing construction of a green hydrogen facility by late 2022. Founded 1997. Market Capitalization: $16.7 Billion as of 04/21.
  • Ballard Power Systems (BLDP) – Ballard Power is a leading provider in clean energy fuel cell solutions with optimized performance and will be conducting operations to create and transport green hydrogen. Founded 1979. Market Capitalization: $6.5 Billion as of 04/21.

Carbon Capture and Storage: While many industries attempt at making a sustained effort in reducing their carbon footprint, another cause of concern to many is the carbon dioxide and other harmful gases currently residing in the atmosphere. There have been surging amounts of investments by governments and venture capitalists to expand the research and the implementation of carbon capture technology. This technology entails capturing carbon emissions at its source, followed by the compression of the carbon into a liquid state and then transporting it to a safe storage facility. Industrialization is only poised to increase, consequently, carbon capture technology is increasingly being seen as an imperative solution to amassing amounts the carbon human activity is leaving behind. As of 2019, the carbon capture and storage market is sitting at a $3 billion market capitalization with an expected compounded annual growth rate of 5.4% from 2020-2026. Notable publicly traded companies currently expanding their research and operation in this market include:

  • NRG Energy (NRG) – NRG is a leader in the power industry for retail electricity generation and distribution and is conducting operations in developing carbon capture technology for its plants. Founded 1992. Market Capitalization: $8.8 Billion as of 04/21.
  • General Electric (GE) – GE has developed a carbon capture research program which helped design and construct 13 CO2 capture solutions (CCS) demonstration projects around the world. Founded 1892. Market Capitalization: $109 Billion as of 04/21.

Energy Storage Systems: Energy storage is another sector of the clean energy market that finds itself in vested interest from governments and investors. Through government policy objectives and private sector initiatives, the general populace can expect a heavy shift towards renewable source-based power generation in the coming decade. However, currently, the infrastructure does not exist to properly store a surplus of this form of energy for a reliable grid. Power production via photovoltaics, wind power, or hydropower is based upon multiple uncontrollable variables, making storage solutions for them very crucial to meet consumer demand. Energy storage solutions are especially prevalent among electric vehicles, which suffer from consumer anxiety about mileage. Expanding energy storage in electric vehicles will allow for greater confidence and acceptance in the shift to clean energy-related transportation. Much of the innovation in this sector concerns the usage of batteries, such as Carnot and rechargeable, to properly maintain collected energy. As of 2019, the market for battery storage for energy storage solutions is sitting at a $7.06 billion market capitalization with an expected compounded annual growth rate of 20.4% from 2019-2027. Notable publicly traded companies currently operating in this market include:

  • QuantamScape (QS) – QuantamScape, in partnership with Volkswagen, produces solid state lithium metal batteries that have increase cell energy density, prolonged life, and incur lower cost of production compared to typical lithium-ion batteries. Founded 2010. Market Capitalization: $17.53 Billion as of 04/21.
  • Enphase Energy (ENPH) – As a solar energy company for retail energy distribution, Enphase has done rigorous research and development in technology for backup energy storage systems capable of holding power generated from renewable systems. Founded 2006. Market Capitalization: $20.99 Billion as of 4/21

For those interested in tracking the broader market for investments in clean energy, ETF’s, or exchange-traded funds, maybe another viable option. Tracking an index for clean energy allows investors to dabble into the potential gains the sector can provide, without the relative volatility that comes with investing in a particular company. The ETF’s listed below track the broader market of small to mid-cap companies that are propagating innovation in clean energy technology such as smart grids, battery storage, power delivery, pollution prevention, and energy conservation:

  • ALPS Clean Energy ETF (ACES) – 40 holdings with a combined growth of 200% 2020 and expense ratio* of 0.55%
  • Invesco WilderHill Clean Energy ETF (PBW) – 58 holdings with a combined growth of 300% in 2020 and expense ratio of 0.7%
  • iShares Global Clean Energy ETF (ICLN) – 33 holdings, $5 billion assets under management, 180% growth from 2020-21 and an expense ratio of 0.46%
  • VanEck Vectors Low Carbon Energy WTF (SMOG) – 31 holdings with a combined growth of over 120% from 2020-21 and an expense ratio of 0.63%

*Expense ratio denotes a fixed fee that funds charge investors for operating costs. A good expense ratio ranges between 0.5%-0.75%.

Works Cited