2021 was a good year for clean energy, so why not the companies?

Investing and Markets 📈
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I want see more investment into clean energy. I believe it will not only stop climate change but transform our world for the better. And though 2021 was a big year for clean energy, it’s also no secret that companies in the sector didn’t fare well.

So, is clean energy no longer an attractive investment? Here’s a short article I wrote on this topic. What do you think?

Let’s look at the numbers to illustrate my point.

Here are the top clean energy ETFs (by assets under management) issued in US Dollars. (An Exchange Traded Fund is a ‘basket of shares’ that can track an index, sector or other asset, and can be bought or sold as a share.) These ETFs invest into clean energy companies and offer a broader overview of the market.

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The graph illustrates the stark difference. While 2020 was a stellar year for clean energy companies, 2021 turned negative for almost all of them.

This chart of how the top 4 ETFs have performed since 2017 gives us another overview.

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One explanation for 2021 is that the sector peaked too early. In 2020, an unprecedented amount of money poured into clean energy ETFs. But there weren’t that many large clean energy companies to invest into, and so the value of the (smaller) companies shot up. As the FT pointed out, global inflows into clean energy ETFs surged to $14.7bn in the six months to March 2021, up from just $1.3bn over the same period the year before. Companies reached valuations that became impossible to justify and when they weren’t able to live up to expectations, their share prices rapidly declined.

Another explanation is that clean energy companies face the same headwinds as ‘growth stocks’ in the technology sector. The prospect of the Federal Reserve ending its bond-buying programme, thus leading to higher interest rates, have spooked most investors. Many worry these companies won’t be able to maintain their high growth rates if interest rates go up sharply. The technology sector has seen similarly brutal declines over 2021.

There are other factors too. President Biden’s Build Back Better Act - which intended to spend billions on domestic clean energy companies - stalled in the Senate. Worse, California is planning to slash incentives and add fees for new home rooftop solar, attracting a barrage of criticism. The bad news keeps coming.

Is the party over for clean energy companies?

Many challenges still remain. Supply chain shocks have raised prices for solar, wind and battery materials along with everything else. That may reduce demand. Moreover, we still don’t know how the Federal Reserve’s attempts to cut inflation will impact the economy. Companies relying on future growth prospects are likely to face a lot of volatility in coming months. Also, the beneficiaries of clean energy growth may be Chinese companies, not American ones.

But there is a positive case to be made too. If you had invested $1000 in any of these ETFs at the beginning of 2020, you would still be ahead compared to the S&P 500 index. Those shares may fall further, of course, but a decline was inevitable given how high shares jumped in 2020.

Investment analysts have been sounding bullish again. Morgan Stanley recently raised its outlook for the sector to ‘attractive’. An accompanying note said: “We see strong growth and valuations that broadly screen attractive”, even if Build Back Better does not eventually get passed. “We see continued strong growth for wind, solar, energy storage, fuel cells, and electrification technologies,” the note added (via Bloomberg). Analysts at BNP Paribas Exane recommended, “playing the renewable theme through the integrated companies, which are better hedged, diversified and more balanced.”

So what is an investor to do?

One option is to wait until the market settles and gains more confidence.

Another option is to focus on the fastest growing segment of the market: electrified transport. EVs are stealing share from petrol and diesel cars at an exponential pace and the sector could see huge growth very quickly. Another is to expect and ignore short term volatility and focus on the longer horizon.

Wall street analysts don’t always get it right but there’s little doubt clean energy is the future and the industry has a lot more to grow. As I wrote a few weeks ago, hold on to your hats.

If you liked this post - I publish a weekly email on clean energy tech!

Also: not all these ETFs are available to buy through Freetrade. Hopefully FT will add more of them in coming months!

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Brilliant post! Thanks for posting @Sunny

I’m already subbed and recommend other to join me.

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This is a misleading post.

2021 was a good year for clean energy, so why not the companies?

You mean “so why not the share price.”

It might be that it has not been a great year for the companies … but you don’t provide any evidence in your post of this.

This might not be popular - but a lot of money in the secondary markets is not investment in companies. Let us be honest about that.

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Great post. Thank you.

A friend wrote a book about called “Energy Revolution” which goes some way to explain the difficulties in making the transition to a decentralised power network. The resistance (excuse the pun) has been quite considerable. He told me that electrical power is called power for good reason!

https://www.waterstones.com/book/energy-revolution/howard-johns/9781856231978

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It could be reworded but misleading is a bit harsh.

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I won’t go down the politicians’ “I misspoke” route. Yes, you are completely right I was too harsh.

I am sorry, I should have just pointed out that the share prices might not be what some people want to see but at least some of the companies may have done well this year.

Slight change of topic: we should also be realistic about share prices in an era where people think that all share prices “should do a Tesla” we should remember that it is not normal for company share prices to go on increasing at the rates many have being doing in the past couple of years. Some of these companies have share prices that have built in all their expected revenues for the next two or even longer years. So how can they possibly increase in price without a fundamental change in their own outlook? Only via speculation.

Some of the those companies may even have great ideas but may not survive for all sorts of reasons. First movers don’t always end up winners.

As for ETF’s … well let us remember that ETF does not mean good. It is not unreasonable for someone to argue that they are concentrated picks … and it is better to go with a more generic ETF to diversify the risk. If any of those “clean energy” companies are good they will make it to the more general market ETF. I am not saying this is the right way to think about it … just that it is not an unreasonable way of thinking about it.

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I worry that this correction could burn a lot of new investors and put them off in the future. There are so many pre profit companies that attracted billions in valuations but are now struggling to deliver on their promise.

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Show me the person who hasn’t replied online with words that read a little harsher than intended and I’ll show you a lier!

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I see where you’re coming from, but companies that have a depressed valuation will also find it more expensive to raise additional cash. So even though the company still exists, share price valuations will have an impact on its long term performance.

To take one example, Tesla’s valuation is the reason why the other companies are piling into EVs after decades of dragging their feet. They’ve suddenly realised that investors think the future lies in EVs, and so they have to go there. Toyota even ditched its focus on hydrogen cars as a result.

More broadly, a rising stock market also means more investment for smaller companies looking to attract money. Rising valuations for clean energy companies has driven much VC money too - so it will have a material impact on the entire sector if that money disappears.

That’s my view of the sector anyway.

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I accept the criticism of ETFs. But I wanted to use them only to note the broader state of the market. when you’re making investment decisions of course you have to make your own decision on whether and how you want to spread your risk. I make no judgements about that.

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You have a very good point here. Can’t argue against it :slight_smile:

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Hah! I was going to call my newsletter “Energy is Power” - for that reason, but decided to go with something less dramatic in the end. I think there’s going to be a big shakeup in power distribution too. One interesting proposal is the “internet of energy” idea that the Chinese are pushing. Others want a far more decentralised system. It could go both ways!

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Hehe. Yes, I imagine that our electric cars will be used as power supplies while charging in the near future.

I only have one Crowd Cube investment and that is in Pearlstone Energy, who build demand-side response systems. With decentralised energy systems we will need more and more of this responsiveness. Supermarkets have been trialing these systems for a while, cutting power to freezers when grid demand is highest.

I understand that Rolls-Royce are developing a mini nuclear reactor, which some consider green but I’m not so sure. It’s a fascinating (and dangerous) time though and anything could happen. Maybe fusion will take over, it’s coming on quite nicely.

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Thanks @NeilB !

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I’m betting the future on solar power being beamed from satellites into receivers here. It’s far more powerful, on 99.99% of the time and not subject to interference. But given its at least 2050 before that becomes a reality, anything is possible.

I hesitated with nuclear energy for the longest time but have now accepted its green and sustainable, but quite expensive. Unless the price comes down dramatically its far better to invest in oversupply of solar and wind IMO.

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My reservations are mainly health related but also waste related. Few people realise that perfectly functioning nuclear reactors are designed off-gas radio-nuclides. I think governments think it’s ok because of cost benefit analysis, but tell someone that it’s worth it as they are dying of cancer/diabetes/heart disease etc.

I think the world is going to rapidly change and the investing culture will too, especially with news like this……

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On radiation impacts, this is a good overview. I think we have to be careful about scare-stories and separate worries from actual evidence.

I have a lot of passionate enviros who have been convinced by nuclear in recent years. But the costs make it prohibitive IMO. This new generation of smaller reactors that Rolls Royce is pioneering may be different.

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It’s a difficult one. Holes in the heart did not exist before the Chernobyl disaster and the condition was originally named ‘Chernobyl Heart’. The risk/cost/benefit of nuclear power may be on the positive side because of nuclear testing and disasters like Chernobyl, and if the pandemic is anything to go by, not having evidence is not proof of safety. Remember when Covid was not airborne all the way up until 8 months after the chief of the WHO stated that it was airborne? That was public health at it’s finest. The world didn’t have enough masks for medics, let alone the public, despite knowing for certain on 13th Feb 2020 (check the WHO transcript).

Maybe nuclear is better than some alternatives, but there is plenty of space for research. I think that IAEA is more a marketing board than a safety board, but that’s just my sense of things.

You are right about the costs. If we can’t guarantee the safety of operative nuclear power plants (Fukushima Diaiichi) how are we supposed the guarantee the safety of “spent” nuclear fuel for 10s of thousands of years into the future? There is a growing realisation with embodied carbon and that the impact of past and present actions are only now being felt across the World. Nuclear is one of those technologies which doesn’t really have a solution to it’s waste, although Liquid Fluoride Thorium Reactors (LFTRs) could be a promising solution. They may not get air-time though as with LFTR, GE can’t sell you their uranium pellets and you can’t make nuclear bombs with them. The great things about LFTR is that they are inherently safe, Thorium is really common - where as uranium is not! Apparently China is working on LFTR and it would be far more appropriate for small local scale power production.

I wrote to my MP last year to suggest that the UK look in to LFTR but I guess the big boys want to sell their little pellets more than the public want safe reactors.

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We have a little bit of home bias when we refer to RR’s “pioneering”. RRs won’t hit deployment for another 10 years. Small reactors are already in operation in China, India and Russia. And there are several others in very advanced (i.e. near term) deployments status in the USA, South Korea and Canada.

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I’ve been guilty of this myself and then yesterday I read this:

The French government is hoping a new kind of reactor could provide a boost for its nuclear efforts. French president Emmanuel Macron has announced a €30 billion ($35 billion) investment plan that includes funding for small modular reactors—lower-capacity plants would theoretically be faster and cheaper to build and could be placed in areas that are unsuitable for large plants. The UK government has also put £210 million ($286 million) behind the development of small modular reactors, but so far the only such reactors to have been connected to a grid anywhere in the world are two that make up a floating power plant docked in Pevek harbor, in the remote northeast of Russia.

Sauce: Europe is in the middle of a messy nuclear showdown

Flogging off the nation’s assets, as is the will of one of England’s main political parties, has been a disaster once again and has left the UK’s once world leading/pioneering nuclear industry basically dead in the water.

I was initially so excited about Rolls Royce’s SMRs but it just takes a little jolt of reality, a quick read about another privatisation failure and the fact that the UK has to beg China for cash to pay France to build new nuclear power plants in the UK annnnnnnnnnnnnd… I really don’t think commercialised SMRs in England will be home designed, home built and maybe not even home funded. France, Russia and China are where I’d place my bets.

Great aeroplane engines though!

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