Forget Stock Market Signals, The Decarbonization Revolution is Gaining Speed

These last weeks have been unkind to offshore wind and renewable energy companies. As widely reported, Ørsted’s stock plunged more than 75% from its high in 2021, while NextEra struggles to recover from a steep drop in October. These stock declines have become headline fodder for a new narrative: ‘The energy transition is in trouble, despite the Inflation Reduction Act.’

While it is no secret that bad news gets clicks, we believe this narrative is objectively false. Yes, hedge funds may be momentarily profiting from well-timed bets against wind energy stocks, but this is far from a sectoral trend, let alone a harbinger of things to come. It would be a bad bet to conclude that energy, water, and urban infrastructure decarbonization is on the wane. When viewed through the correct lens, the energy transition and progress towards deep decarbonization are healthy and accelerating.

To understand why this has been so wrongly contextualized, let’s take a step back and breakdown recent economic events.

Ørsted

Ørsted and other ‘wind majors’ made a series of large, but ill-timed bets on the US and UK offshore wind markets. These companies agreed to long-term power sales contracts that lock the price for their energy. Those deals were made with states and federal agencies before the pandemic. Then high inflation increased costs, supply chain disruptions caused further problems and high interest rates capped off the mess.  These pre-pandemic power purchase contracts didn’t contemplate the new price reality. When governments were slow to re-negotiate, these companies got pinched.

The wind short sellers reflect recent loss of enthusiasm for green energy stocks. The S&P Global Clean Energy index, (100 renewables stocks), lost ground in 2022 and dropped another 30% this year. But this is a lagging rather than a leading indicator and deeply connected to the temporal interest rate environment. The problem is that the stock market doesn’t offer us a forward-looking view and is therefore a poor gauge of the pace of decarbonization and its future trajectory.

NextEra

Let’s consider one of the poster children for recent bad stock price news, NextEra. Simply put, their ‘TopCo / YieldCo’ approach has been to develop wind and solar projects at the “TopCo” then drop them into their “YieldCo” (NextEra Energy Partners), which sells shares to public market investors seeking stable, predictable returns. This worked well when project development was fueled by low interest rates but broke down when rates began to rise.  Without economically viable projects to ‘drop down’ into YieldCo, they slashed dividends, shocking investors who perhaps didn’t understand the volatility of the business model they had invested in.

Interest rate hikes have impacted numerous businesses - which is the point of hiking interest rates.  However, through this rate surge, numerous energy and water transition companies have continued to thrive, managing supply chain issues and interest rate impacts. For example, Intersect Power, one of the fastest growing solar, wind and green molecule companies, brought 2.2 gigawatts of solar power online in California and Texas in 2023, plus one of the largest utility-scale deployments of Tesla batteries in the world – on time and on budget. Smart, well-managed companies like Intersect will continue to navigate near-term challenges.

Looking ahead

The implementation of solar and wind in the US continues to outpace new fossil plants.  This decline in new fossil fuel generation is driven by the cost of solar PV falling by 80% in the past decade, wind by 65%, and batteries by 80%, with adoption of all three scaling exponentially and globally. The public’s embrace of these technologies is high and grows by the day as more of us experience the impacts of the climate crisis firsthand.

One might be tempted to link the pace of decarbonization directly to the growing onslaught of the climate crisis – and it is - but the reality is far broader. A recent RMI piece by Sam Butler-Sloss and Kingsmill Bond said it best, “What lies at the heart of the energy transition is a shift from an expensive, inefficient, politically volatile, scarce, commodity-based fossil fuel system to cheaper, cleaner, leaner technologies that offer continuously falling costs and are available everywhere. We are moving from heavy, fiery molecules to light, obedient electrons; from hunting fossil fuels to farming the sun.”

The movement towards deep decarbonization will progress in fits and starts. Some regions and sectors will advance while others will regroup, but the trend is undeniable and irreversible. Decarbonization is a revolution that no one should bet against.

As we navigate the complexities and opportunities of the decarbonization revolution, it's clear that the journey is not just about overcoming challenges, but about seizing the transformative possibilities for a sustainable future. At Climate Adaptive Infrastructure (CAI), we are at the forefront of this revolution, investing in infrastructure that helps to mitigate both the structural risks and economic pressures associated with the climate crisis. Our commitment is not just a business strategy; it's a pledge to future generations. Discover more about our vision, projects, and the work we do at https://www.climateadaptiveinfra.com/.