Energy policy is gathering momentum around the world. A series of major policy initiatives in the US are prompting European leaders to consider their own regulatory initiatives, with both regions looking to loosen China’s current grip on many key components of the renewable energy ecosystem. Here we break down the key implications of recent policy developments and investigate how this is impacting opportunities across different markets.
What is the Inflation Reduction Act?
How will the IRA really work?
Will the IRA achieve its intended impact?
How is the IRA encouraging policy change in other parts of the world?
How are new climate policies impacting investment opportunities?
Whichever side of the Atlantic investors are focused, we see this latest wave of climate spending making an impact across a range of different sectors and asset classes. In order to gauge the impact on portfolios, we asked a group of our investors for their views.
Tanya Barnes, portfolio manager, Private Capital Group
Climate solutions that promote onshoring of manufacturing – especially in the energy, battery and automotive sectors – or provide related enabling technologies will likely be immediate beneficiaries from the IRA and EU GDIP. The IRA also earmarks over USD 135 billion in funding for sectors that demand the greatest share of global GHG emissions, namely transportation, industrials & manufacturing, food & agriculture, and real estate. We believe this funding will stimulate investments in sustainable fuel and vehicles, resource-efficient manufacturing, climate-smart agriculture, and building electrification.
On the supply side, the extension of tax credits for community solar projects is particularly interesting. We are awaiting additional detail on the tax credit allocation process and eligibility from the Treasury. Market participants expected guidance in February, but the release from Treasury was not detailed enough to enable investment decisions. We expect project delays in 2023 as a result of the lack of clarity. If clearer guidance is issued soon and the impact of the IRA is fully realised, we believe that community solar capacity could more than double, with over 11.5 gigawatts installed by 2027.
We expect the EU GDIP to similarly drive investments in both energy supply infrastructure and demand-side technologies, particularly those enabling home and vehicle electrification, and decarbonisation of heavy industry.
Francesco Conte and Sara Bellenda, portfolio managers, International Equity Group
The IRA will lead to opportunities across a broad range of climate change solutions. We’re focused on three key areas.
First, the IRA aims to accelerate the transition to clean energy while also re-shoring renewable technologies. This directly benefits clean energy providers, and we have investments in companies providing solutions such as heat pumps and batteries.
Second, producers of electrification equipment will benefit not only directly via subsidies, but also indirectly from the additional need for electrification infrastructure given the push towards renewables and energy efficiency.
The third focus is new technology. According to data published by the International Energy Agency in October 2022, producing green hydrogen using renewable energy costs between USD 3 and USD 8 per kilogramme (kg), compared to only USD 0.5 – USD 1.7 per kg when using natural gas. Through the IRA, clean hydrogen plants can receive a tax credit of up to USD 3 per kg, encouraging more investment which can hopefully reduce future costs. Our investments in new technologies are currently modest but could become more meaningful if subsidies for areas such as carbon capture and hydrogen materialise.
Ed Fitzpatrick, portfolio manager, Global Fixed Income, Currencies and Commodities Group
Since the Biden administration took office, there has been an effort within the US Treasury to develop a sustainable financing programme. With the passage of the IRA, the US Treasury will be able to specifically link green projects to funding needs and issue green bonds if it chooses.
While there has been no indication of intent to issue green bonds so far, the US Treasury’s foray into this space would be a tremendous benefit to the development of the market, adding further diversification within the US dollar universe. Additionally, it would allow the green bond market to more closely resemble traditional high-quality diversified fixed income universes that are more familiar to the industry and investors.
Danielle Hines, portfolio manager, US Equity Group
We think that the investment opportunity lies not only in the companies that are directly exposed to the provisions in the IRA, but also the companies that are indirectly exposed through leverage to the broader value chain. For example, increased incentives for electric vehicles will not only benefit the vehicle manufacturers themselves – grid infrastructure will be required to handle increased load, semiconductors are necessary to enable the innovation, and renewable generation is required to service demand. The same indirect benefits will likely play out across other areas, such as hydrogen. We believe the IRA will help all the impacted sectors to become much more dynamic in the years to come.
We see particular potential within the utilities sector given how the IRA will drive longer duration of growth for companies in this space. In practical terms, the bill gives greater visibility on more than two decades of renewable tax credits. The IRA’s new opportunity set now also includes upgrades of existing renewable plants and collocating standalone energy storage projects on the current footprint of energy sites.
Sustainable Investing Insights Webinar: Policy tailwinds for climate innovation
The momentum behind climate-focused policy across the globe is accelerating following the introduction of the US Inflation Reduction Act. In the first episode of our Sustainable Investing Insights series, Hugh Gimber is joined by Francesco Conte, co-manager of the Climate Change Solutions strategy, to discuss the latest global policy developments, the potential influence they could have on markets, and the opportunities being created for investors.