Clean Energy Bulls Finally Have Reason To Be Positive

Last week, the COP28 climate summit in Dubai came to a close with a new agreement that became the first UN climate deal calling for countries to cut back on fossil fuels. This came after the initial draft faced widespread pushback for failing to include strong enough wording on phasing out fossil fuels. The draft text also included a call for “tripling renewable energy capacity globally and doubling the global average annual rate of energy efficiency improvements by 2030.” Well, clean energy bulls are in luck because renewable energy has finally hit the right spot on the cost curve. In its latest Carbonomics report, Goldman Sachs has revealed that cost inflation that hit its peak during the 2022 energy crisis has started to reverse with many key clean energy technologies turning strongly deflationary. “From here on, the deflationary forces are likely to win, and this brings back an affordability to the decarbonization path that not only accelerates it but makes it more attractive to the consumer,” Michele Della Vigna, head of Natural Resources and Carbonomics Research for Goldman Sachs Research, has said. Della Vigna notes that investors remain deeply engaged with sustainability and decarbonization, but has also acknowledged that the focus now is on a more realistic energy transition that emphasizes material investment in green capex rather than on exclusion and divestments [of fossil fuels]. Deflationary Pressures Last year’s crisis gave rise to the so-called greenflation whereby the cost of EV batteries, solar panels and even wind power equipment spiked mainly due to global supply chain snags,  record-high cost of battery metals such as lithium, nickel and cobalt as well as high oil and gas prices. According to the International Energy Agency (IEA), a big reason for the increase in prices for lithium, nickel and cobalt was the insufficient supply compared to demand in 2021. The situation was particularly dire with lithium, leading to the price of the metal increasing more than 500%. But as Della Vigna has noted, deflationary pressures have been rapidly building up. Lithium prices have now reversed in spectacular fashion. After hitting an all-time high of CNY 595,000 per tonne ($83,400 per tonne) in November 2022, lithium carbonate prices in China have cratered to the worst level in two years at CNY 97,500 per tonne ($13,670 per tonne), a level they last touched in August 2021, thanks in large part to excess supply from China, Australia and Chile. The lithium price crash has been so deep that BMI, a Fitch Solutions research unit, has predicted the pendulum could swing to the far end thus  ushering in a lithium shortage as early as 2025. Meanwhile, improving  economies of scale in electric vehicles due to rapid adoption will continue making those technologies more affordable. Even better, interest rates have reversed course, too. Over the past week, the clean energy sector has gone wild with solar stocks in particular enjoying a massive rally after the U.S. Federal Reserve announced that it will keep short-term interest rates unchanged. To sweeten the deal further, the Fed forecast three cuts next year, a potentially very bullish outlook for 2024. Interest rates have skyrocketed over the past few years, going from about half a percentage point during the pandemic to more than 4% as the Fed cut back on its stimulus program. Luckily, the Fed has grown a lot less hawkish as inflation keeps coming down. The 10-year treasury yield hit a 16-year high of 4.98% in October but has pulled back to 3.95% currently. The wild solar rally can be chalked up to the fact that solar installations are largely driven by interest rates. U.S. solar buyers usually sign 20- to 30-year purchase agreements to buy solar electricity from an installer, mostly with no down payment required. The installer then sells off any upfront subsidies and/or tax benefits and finances those long-term payments as you would do with a mortgage or bonds. This financing becomes more expensive when interest rates rise squeezing margins for the installers unless they counter by increasing prices. This scenario has been playing out ever since the Fed started raising interest rates in a bid to bring down inflation. Rystad Energy: Fossil Fuel Emissions Will Peak Within Two Years Norwegian energy consultancy Rystad Energy has predicted that the  world is very close to the inflection point for fossil fuel carbon dioxide (CO2) emissions, with the firm seeing emissions peaking in just two years. According to Rystad, global CO2 emissions will hit an all-time high of 39 gigatonnes per year (Gtpa) in 2025 before settling into a terminal decline. Rystad has noted that emissions spiked in 2022 after many countries abandoned their climate goals and turned to more carbon-intensive fuels such as coal as a short-term solution to their energy security crises following Russia’s invasion in Ukraine. However, the latest UN climate summit proves that the majority of countries remain committed to their long-term climate goals.