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What's really going on?
The news covering solar, wind, and electric vehicles has been negative lately. Are things as bad as they seem?
One thing I’ve been trying to square lately is the negative headlines I see daily in climate news and what’s really going on.
I spend a lot of time on this topic because I think it’s important. Many people will shrug off how others feel, but the reality is these headlines shape the perception of industries and trends that I feel are vital to the future of our economy.
If the headlines are consistently negative from sources people trust, the interest in the space from investors, talent, and customers will eventually wain, no matter how important we think it is.
Real Pain Points
We can’t discount that there are real pain points in these industries right now. The headlines center around rising prices for consumers. EVs are too expensive, and solar plus offshore wind creates higher electricity prices.
These headlines, especially in election years, get clicks because people are rightfully worried about their financial situation and coming off the worst inflation in three decades. So, we’ll see more in 2024 and won’t be able to run from them.
Let’s be honest about those challenges and point to data and history as examples of why the obstacles we face today set us up for success in the future and a multi-decade run of financial returns.
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In the last two weeks, most electric vehicle headlines have primarily pointed to a pullback by traditional OEMs.
Jesse Jenkins wrote a viral thread on Twitter highlighting why some of these headlines are more sensationalist than based in reality.
He nailed two trends that are driving these headlines. First, traditional OEMs are the main subjects of these headlines. These incumbents are building entirely new supply chains for electric vehicles. This transition requires an investment, and the cost of capital has increased dramatically over the last 18 months thanks to rising interest rates.
Additionally, Tesla (who has already invested in these supply chains and factories) dropped prices dramatically to better compete with entry-level EVs and requalify for IRA tax credits.
These price drops did eat into Tesla’s profitability, but they continue to deliver record units. This is actually great for long-term market health. Instead of EVs being a luxury good, they’ll continue to be more accessible to a greater portion of the population while an EV-focused OEM can remain profitable.
If the headlines in electric vehicles are a seven on the negative scale of 1-10, offshore wind might be a 20.
Much like traditional OEMs in electric vehicles, offshore wind providers are facing interest rates and cost of equity challenges that have raised project costs by over 50% in the last two years.
We can’t discount the challenges of building these projects in higher-rate environments. But we’ve also been here before with wind power’s initial push into the US grid.
Now, with costs still high and a new era of competition roiling the long-protected energy business, alternative sources of power are fighting for their lives. These so-called renewable sources may well survive only as window dressing for utility company annual reports, many industry experts say.
The excerpt above is from a 1995 New York Times article highlighting the difficulty of wind power. It goes on…
The renewables are turning into an endangered species because of the brutal economics of the utility industry, which is awash in surplus power and increasingly faced with big commercial customers demanding lower rates… particularly now that natural gas is so plentiful and gas-fired generating plants so inexpensive to operate.
We’ve been here before. But, what doesn’t change is that customers want cheap and reliable power. That’s the alternative we should always seek to be.
Earlier this year, California passed a new net metering rule that dramatically changed the economics for consumers installing rooftop solar.
These changes naturally decreased the pace of deployment in the state, which caused short-term disruptions to companies with revenue concentrated there. The year-end revenue guidance from companies like Enphase Energy and SolarEdge fell well below expectations as the first impacts of the new regulation were felt.
But, the fact remains solar is the fastest-growing sector in the US, and California’s overall importance to the market continues to decline due to population changes and the growth of solar in other states like Texas.
Additionally, as is the case in other technologies. The EU continues to provide an avenue of revenue diversification for solar. Germany and Spain continue to experience rapid growth and will provide firms with new growth as they diversify away from the US.
As the industry becomes more diversified across geographies and segments, it will be less susceptible to shocks in regulatory changes. Much like EVs, these changes create a healthier long-term market that can endure decades instead of relying on sudden, rapid growth.
Throughout the history of all technologies, negative headlines come and go. Gartner has made a lot of money on their infamous hype cycle framework for a reason - it’s time-tested.
The energy transition will be no different with continued investment in technology and access to more of the buyer universe. But perception is a reality for people, and we need to be able to listen and respond accordingly.