Written by Tanay Pingle
“The transition to clean energy is happening worldwide and it’s unstoppable. It’s not a question of ‘if’, it’s just a matter of ‘how soon’ — and the sooner the better for all of us.”
That’s a quote from Fatih Birol, director of the International Energy Agency (IEA), and one that’s indicative of the global perspective on clean energy. On the surface, clean energy development looks to be moving at a steady pace. Legislation like the BIL (Bipartisan Infrastructure Law), which committed the US to reduce emissions by 50-52% from 2005 levels and create a 100% carbon pollution-free power sector by 2035, has been lauded by both parties as a effective measure to transition to more sustainable energy practices. Over 192 countries have ratified or acceded to the 2015 Paris Agreement, which pledges to keep the mean rise in global temperature below 2℃. Finally, according to Pew Research, “The new survey finds 69% of Americans say the most important energy priority for the country should be developing renewable energy sources, such as wind and solar” (Kennedy, 2023). It’s clear that both governments and the people are embracing clean energy initiatives, so why have clean energy stocks been steadily declining for the last 3 years? The answer’s much more complicated than it seems.
In 2008, Blackrock launched the iShares Global Clean Energy (ICLN) ETF. Essentially a collection of clean energy related securities, it serves as a reliable method of tracking the clean energy sector. In total, clean energy funds suffered an outflow of $1.4 billion (Reuters, 2023), and on October 25th the ICLN closed at its lowest price in the last 3 years, a telltale sign that the clean energy sector is in jeopardy. In order to understand why exactly clean energy’s been on the downturn, we need to look at the dramatic increase in interest rates. To combat rampant inflation, the Federal Reserve implemented a series of increases in short-term interest rates. Currently, the interest rate is sitting at around 5.25% – 5.5%, which has led investors to dramatically scale back investments. When interest rates rise, it becomes harder for banks to borrow money from each other. According to the Annual Survey of Entrepreneurs from the Ewing Marion Kauffman Foundation, around 17.9% of entrepreneurs rely on bank loans to fund their startups, while 10.3% rely on personal credit cards (Robb, Morelix, 2023). For an industry like clean energy, where many high growth early stage startups rely heavily on loans to stay afloat, this increase in rates makes it much harder to sustain rising operational costs and develop products. Decreasing profitability and future growth puts pressure on investors to pull out, making investing in the clean energy sector less attractive in the current economic climate. When a startup’s future valuation is jeopardized by a shrinking bottom line, we see the downward trend in stock prices that’s plagued the ICLN for the last 3 years.
However, a decrease in investor confidence isn’t the only reason clean energy is struggling in today’s economy. Since 2021, raw material costs around the globe have been rising rapidly. to accurately visualize just how fast, we can look at polysilicon as a case study. Polysilicon is the main component in the development of solar panels, with 79% of the world’s supply coming from China. According to a recent McKinsey report, “Between 2020 and June 2022, the price of polysilicon rose by 350 percent” (McKinsey, 2023). The main reason for this monumental price increase is the supply chain disruptions that resulted from the COVID-19 pandemic. Clean energy developments rely heavily on various rare earth metals like neodymium and praseodymium, many of which are only found in select parts of the world. According to the IEA, “The Democratic Republic of Congo supplies 70% of cobalt today; the People’s Republic of China 60% of rare earth elements (REEs); and Indonesia 40% of nickel” (IEA, 2023). The fact that rare earth element mining and refinement is concentrated in only a few countries means that the global supply chain is very easily upset. Between the Russia-Ukraine War, COVID-19 lockdowns, factory accidents, and floods, shipping costs are at an all-time high. James Fusaro, a solar energy entrepreneur, explained on an earning call that “at the same time as we are seeing record demand for solar, our industry is contending with increases in steel and shipping costs that are unprecedented both in their magnitude and rate of change” (Copley, Erickson, 2023). Despite there being a surge in demand for clean energy technology, it’s simply not sustainable for startups and companies to operate with decreasing funding and rising operational costs.
After looking at the evidence, it’s clear that the clean energy sector is in a crisis. Despite mounting public and legislative support for clean energy technologies, entrepreneurs are facing numerous challenges when it comes to acquiring capital and resources amidst financial turmoil. Clean energy developments are critical to the transition to a more sustainable future that so many governments and people are striving towards, but until the clean energy market is less volatile it’s unlikely that significant progress will be made.
Works Cited
Bettoli, A., Heineke, F., Janecke, N., Nyheim, T., Schlosser, A., Spitzer, S., Staudt, C., Winter, R., & Zivansky, J. (2023, February 17). Renewable-energy development in a net-zero world: Disrupted supply chains. Mckinsey.com; McKinsey & Company. https://www.mckinsey.com/industries/electric-power-and-natural-gas/our-insights/renewable-energy-development-in-a-net-zero-world-disrupted-supply-chains
Calma, J. (2023, October 24). Clean energy is officially ‘unstoppable’ now. The Verge. https://www.theverge.com/23930058/forecast-clean-renewable-unstoppable-international-energy-agency
Clean energy supply chains vulnerabilities – Energy Technology Perspectives 2023 – Analysis. (n.d.). IEA. Retrieved October 28, 2023, from https://www.iea.org/reports/energy-technology-perspectives-2023/clean-energy-supply-chains-vulnerabilities
Copley, M., & Erickson, C. (2021, May 18). Surging metals prices drag on renewable energy industry. Spglobal.com. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/surging-metals-prices-drag-on-renewable-energy-industry-64322166
Kennedy, B. (2023, June 28). Majorities of Americans prioritize renewable energy, back steps to address climate change. Pew Research Center Science & Society. https://www.pewresearch.org/science/2023/06/28/majorities-of-americans-prioritize-renewable-energy-back-steps-to-address-climate-change/
Renewables funds see record outflows as rising rates, costs hit shares. (2023, October 10). Reuters. https://www.reuters.com/sustainability/climate-energy/renewables-funds-see-record-outflows-rising-rates-costs-hit-shares-2023-10-09/
Robb, A., & Morelix, A. (2016). Startup financing trends by race: How access to capital impacts profitability annual survey of entrepreneurs data briefing series. Kauffman.org. https://www.kauffman.org/wp-content/uploads/2019/12/ase_brief_startup_financing_by_race.pdf