Outstanding Investor Questions From Outstanding Energy Transition Experts

By Tom Butcher, Director of ESG

Industry experts discuss the supply of green metals, the Inflation Reduction Act, how investors can access the space and answer some lingering questions of which you might not have been not aware.

When it comes to assessing the scope of the energy transition, perspectives vary. However, there is one element over which there is seemingly no dispute—its overall complexity, which requires participation and coordination across public and private stakeholders.

This served as the backdrop for a special event hosted by VanEck which brought together nearly 100 attendees across a mix of portfolio companies, leading investment consultants and allocators.

Joining VanEck’s Veronica Zhang, Deputy Portfolio Manager of the Environmental Sustainability Strategy and Natural Resource Equity Strategy team’s Alternative Energy and Industrials Research Analyst, and Charl Malan, Natural Resource Equity Strategy team’s Senior Research Analyst for Base and Industrial Metals, were Prakash Patel, Chief Strategy Officer at Stem, Inc., a company at the core of which is an AI platform; Drew Petit, Director – U.S. Equity Strategy at Citi; Mark Raskopf, Head of Tactical Trading Strategies and Commodities and fund portfolio manager at Russell; and Ben Steinberg, Executive Vice President at government affairs firm Venn Strategies.

What happens when you bring together such a diverse lineup of experts? A collaborative, open dialogue spanning many topics, including supply of green metals, the Inflation Reduction Act (IRA), and how investors can participate and access the space, some interesting, lingering questions arose about which either you might not be not aware or the importance of which may not have fully registered.

Where’s the IRA?

The introduction of the IRA was clearly a milestone, but in this regard, Mr. Pettit made two particularly noteworthy observations. The first was that when looking at how investors may consider clean energy, the theme is not “dead,” but just requires some context.

The second was that, while IRA might be a catalyst for the energy transition, he didn’t know whether we’d even reached the “starting gate.” He sees tax season next year as when things will really start. Many companies are positioning in preparation for it and factoring it into investments. However, what they are not doing is putting IRA in guidance. What The Street isn’t doing is putting it in estimates. And, finally, what the market’s not doing is putting it in valuations. Among other things, this has led to clean energy and infrastructure names with premium growth expectations (likely lowballed) that are still trading in line with peers because the market is not pricing these factors in yet. Not least because they’ve not finished their tax work yet and don’t want to put it in the numbers.

What is the Federal Government doing to Support Industry?

Mr. Steinberg noted the importance of the mixture of public and private finance to the energy transition for getting through the next few years and that public financing could not have come at a more challenging but more important time. He also provided some fascinating insights into what funds different U.S. federal agencies are being allocated for the energy transition (and for what), as well as giving example of how dysfunctional the process can be.

U.S. federal agencies’/departments’ mobilization to help secure a reliable and sustainable supply of critical minerals used for the electrification economy

Source: Venn Strategies.

^* Office of the U.S. Trade Representative,^† Export-Import Bank of the United States,^‡ U.S. International Development Finance Corporation.

For a start, in the U.S., there is, now, not just one list of “critical materials,” but three. One each at: the Department of the Interior (“Interior”), the Department of Energy (“Energy”) and, finally, the Department of Defense.

While copper may, recently, have joined Energy’s list, it is not on Interior’s list. This is relevant because, when legislation is written, much of the time it will tie funding and policies to these lists. However, this can lead to confusion. As an example, on the one hand, a lot of support has been given to the mining sector. On the other, however, there’s also been much more discussion around inclusivity, community engagement and NIMBY¹-ism. In the case of copper, the metal is on Energy’s list, but even though it is now tied to the 48C² tax credit for the first time, it will probably never get on Interior’s list because the administration has now blocked three very substantial copper projects in the U.S.

That said, it was, though, very interesting to learn that, with its remit on mining policy (especially on federal land), the Department of the Interior is seeking to change the General Mining Act of 1872, incredibly the last time federal mining law was written!

Where are the Commodities Researchers?

Despite the growing complexity of the production universe, the changing supply chain and commodities’ analysis getting more and more complex every day, Mr. Raskopf doesn’t see new people starting commodities research companies to profit from this complexity. He felt that currently there is an unusually low number of professionals in the space, particularly commodity traders. And this despite the space being “super-attractive.”

He also noted that, sadly, he’s not seeing a lot of pension investors adding to the inflation-sensitive portions of their traditional portfolios. He thinks this is probably linked to the green transition narrative and, maybe, some people taking out commodities altogether. He certainly doesn’t think now is a good time to do so.

Some Important Goals Reached, but How Much More to Go?

While it may be well known that the sums needed to reach global “Net Zero” targets by 2050 are huge, when the amount—at least $150 trillion—was contextualized as being the equivalent of creating six U.S. economies, the magnitude of the challenge truly hit home. Another fun fact that Ms. Zhang again mentioned, was that while EV penetration of approximately 25% in China is the highest in the world (in Europe it is 20%-22%), in the U.S., only earlier this year did 10 states cross the 10% benchmark. (This is commonly accepted as the tipping point after which EV sales accelerate rapidly.)

EV Share of New Passenger Car Sales in Select States in 1H 2023

Source: Experian Automotive, BNEF.

Based on 2023 projections, reaching the Net Zero goals by 2050 requires more than $5 trillion of spending a year. Currently, since they are considered, relatively, as the most mature technologies, this is being driven by renewable energy and EVs/electrified transport, each of which has grown significantly over the last five years. However, there is quite a way to go yet before real, meaningful, adoption. On an absolute level and as part of meeting the Net Zero challenge, the U.S. hasn’t even started to touch other technologies, such as hydrogen and carbon capture, which she sees as definitely being at an inflection point for commercialization in the next couple of years.

Free Power?

In addition to some fascinating insights about his own firm, when talking of the role of technology in the energy transition, Mr. Patel wanted us to note that in many geographies today, the capex of new renewables is cheaper than operating existing conventional generation assets. He sees this as the result of the incredible pace of innovation we have seen in the solar and wind spaces, together with the energy storage sector. Many market analysts are even projecting that, in many geographies, the cost of generation is going to be effectively free in this decade.

Key Takeaways

As investors continue to consider the overall impact of the energy transition and where opportunities exist today and going forward, very briefly below are some of the takeaways:

• The energy transition is astonishingly complex but therein can lie the opportunities.
• The agendas of different U.S. federal agencies can often clash and lead to confusion.
• The sums required to reach Net Zero goals by 2050 are huge and we’re not even off the starting blocks yet with some technologies.
• The IRA is not yet being factored into guidances, estimates or valuations.
• As renewables become cheaper, the cost of power generation could, effectively, be free within this decade.
• Commodity traders are in high demand, but their numbers are limited.

The exceptional caliber of the speakers and the depth, breadth and range of their viewpoints helped to shape the energy transition discussion and outlook. Our thanks to them for making this event possible.

For more information, please see No Energy Transition without Green Metals and The Unspoken Supply Constraint: No Miners, No Metals, No Energy Transition.

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IMPORTANT DISCLOSURES

¹ NIMBY = Not In My Back Yard: “[T]he behavior of someone who does not want something to be built or done near where they live, although it does need to be built or done somewhere.” Cambridge Dictionary.

² U.S. Department of Energy: “The Qualifying Advanced Energy Project Credit (48C) program was established by the American Recovery and Reinvestment Act of 2009 and expanded with a $10 billion investment under the Inflation Reduction Act of 2022. The Advanced Energy Project Credit provides a tax credit for investments in advanced energy projects, as defined in 26 USC § 48C©(1),”.

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Originally published 30 October 2023. 

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