How Long is Your Green Horizon? The Dichotomy Between Private and Public Markets
- Private Equity
- October 14, 2022
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Public and private equity investments can converge at times. That happens when both venture capital and private equity benefit from great inflow of capital and robust valuations based on the promise of hypergrowth future cash flows. This is usually for companies in specific “hot” segments.
While that seems currently to be the case for venture capital funding flowing into CleanTech, the opposite is the case for shares of listed companies in the same exciting spaces, as public CleanTech has been suffering from a prolonged sell off. Valuation levels now are clearly not pricing in a robust future of green cash flows. This year is proving to be a very difficult one for publicly traded companies in the green space, but that does not seem to be the case for venture capital investments.
What does this dichotomy indicate? That the duration of the strategy determines what an investor prices in. Investors with a horizon longer than five-years are finding exciting opportunities in long duration energy storage solutions, software and AI based platforms for renewable energy asset optimization and monetization, new battery recycling solutions, and new pyrolysis processes for green hydrogen production. These continue to attract tremendous attention.
How Long is Your Green Horizon? Short vs Long, Private vs Public
The inflows into private Climate Tech have increased, and private and public valuations are seeing opposing trends. Investors pricing shares in the equity capital markets are only looking at the very near future. Like drivers on a road with thick fog, they can only see what is right ahead. Future cash flow is currently deeply discounted, and fossil fuel surplus is seen as a “safe” way to invest.
However, if we look at the private market, a different dynamic is at work. The numbers for CleanTech VC investments showcase the discrepancy. Venture capital funding continues to flow towards Climate Tech, Bloomberg Green estimating that over $35 billion was deployed last year, a figure almost twice that of 2020. There is no world where the relevant solutions in green energy, green transportation and sustainable products do not benefit from the material tailwind of climate action and price deflation.
The U.S. Inflation Reduction Act (IRA) provides an additional $370 billion in climate spending, with incentives for solar and wind, but also for emerging technologies like long-duration energy storage. Investors with a short-term focus are selling clean tech and valuations are depressed, while investors with a longer-term horizon like those that invest in VC, find in green solutions a very robust investment strategy.
When it comes to clean energy storage, there are two listed companies with very relevant solutions for the behind-the-meter and the in-front-of-the-meter (utility scale) segments. Fluence Energy (FLNC, down 58.97% from January to September) focuses on long duration energy storage that can solve renewable energy intermittence. As grids get close to 70% of solar and wind penetration, it is of paramount importance to have a way to firm the electricity generated from renewable sources.
Fluence reiterated guidance of $1.1 billion of revenue for the year and the company currently trades at ca. 2x revenue, with a cash position of ca. $700 million and the potential to reach positive EBITDA in the next 12 to 18 months. Guidance was maintained despite the force majeure of Chinese battery supplier earlier in May, an event that triggered the selloff in its shares. The IRA stimulus gives further support to Fluence’s regionalization push, starting with a new Utah manufacturing facility that begins operation later this year. A significant milestone was the recent announcement of their largest “storage as transmission” 250 MW battery based storage system in Germany, designed to alleviate pressure on the grid.
Stem (STEM, down 29.68% from January to end of September) has a revenue that is a quarter that of Fluence’s, but currently trades at a $2.2 billion market cap, above that of Fluence. San Francisco-based Stem leverages its IT platform Athena to provide smart battery storage solutions that take them beyond energy storage assets, into microgrids, utility bill optimization, and commercial EV charging. In December last year, Stem acquired Also Energy, a solar asset management company for $695 million (75% cash, 25% equity), broadening its offering to include solar asset management.
Both companies need to demonstrate an acceleration of revenue in the next quarters, while maintaining SG&A and keeping operating expenses under control, therefore having a clear path to profitability. While supply chain issues remain, the speed of growth of their markets could not be more robust.
Meanwhile, long-duration energy storage continues to gain a lot of attention from private investors. According to Mercom Capital, in the first half of 2022 energy storage companies raised almost as much capital from private investors as in the full year 2021. Large deals in the period included U.S. based Eolian Energy with a $925 million VC funding raise earmarked for energy storage, like previous investment into portfolio company Able Grid. Another large transaction was $250 million invested into compressed air energy storage Hydrostor.
Solar Gains Monumental Momentum, Pipeline of Projects Tells a Clear Story
Higher fossil fuel prices and investments into LNG processing and midstream assets are being misinterpreted as a lack of acceleration of the renewable energy transition. When analyzing the pipeline of renewable projects, for example in the U.S., we see a very different story; it is abundantly clear that renewable energy is scaling up. Bloomberg referred to the pipeline of PV investments as a “mind bending” amount of solar PV and clean energy storage projects.
Lawrence Berkeley National Laboratory gathered data at the end of last year from seven independent system operators and 35 utilities to see what solar PV projects are waiting for grid connection. The pipeline under these entities represents ca 85% of the U.S. electricity load. This research found that nearly 1,000 GW of potential new utility scale solar PV generation or storage capacity had requested grid connection to the network. In the Solar Studies Report by the U.S. Department of Energy, their fastest scenario of decarbonization + electrification estimates US 1,000 GW of solar to be added by 2035.
As Lawrence Berkeley found out, the current pipeline is already in line with this long-term ambition. The Inflation Reduction Act will accelerate the development and adoption of solar PV. Bloomberg points out that the vast majority of the 1,450 GW of new power generation under development in the U.S. is renewable. Of this large pipeline of 1,450 GW (including energy storage projects), 46% is solar PV.
In other words, around 667 GW of utility scale solar in the U.S. is under development and waiting for grid connection. Not all of these projects will be built, but the size of the existing pipeline showcases that the 2035 DoE forecast of 1,000 GW of solar, while ambitious, is within reach. Of this pipeline of in front of the meter solar, 42% represents projects that are hybrid and have integrated clean energy storage assets alongside generation.
In Europe, solar rooftops are expected to represent the largest share of solar PV in the EU. The REPower EU strategy has increased the bloc’s ambition for solar energy. If the European Union Solar Rooftop Initiative yields its full results, the countries will be adding 58 GW of “local solar” by 2025. A key part of the push is a solar rooftop mandate for all new public and commercial buildings by 2026, all existing public and commercial buildings by 2027 and all new residential buildings by 2029. That brings us to the end of the decade.
By 2030, the share of wind and solar energy in Europe will have doubled from the current total of 33% to 67%. By then, solar installed capacity in the block will be ca. 600 GW, representing the largest electricity source in the EU – with more than half coming from rooftops. If we consider the U.S. Department of Energy Solar Studies report, the U.S. could be adding ca. 1,000 GW of solar to its grid by 2035, of which over 25% could be “local solar.”
Between 300 GW of solar rooftops in Europe and 250 GW in the U.S., the world will have reshaped its grid by 2035, with over 500 GW of solar capacity installed at the point of consumption. Yet, the share price of the companies leading the decentralization, digitalization and decarbonization of the grid do not seem to take into account this “mind bending” growth.
Green Growth as a Recession-Proof Strategy
The equity sell off is unlikely to stop until the U.S. Fed stops increasing interest rates. Repricing future cash flows is a harder exercise when the level of risk-free rates is itself unclear, and how negative the implications of inflation and higher interest rates will be for global economies’ demand for goods. If NatGas and crude prices remain high, it will continue to create demand destruction and accelerate the adoption of green alternatives, even if that means an economic scenario of prolonged inflation (or “fossinflation”).
If hydrocarbon prices subside in a case where the central banks’ hawkishness causes a deeper global recession, interest rates will remain at a low level and growth will again be top of mind. In either scenario, green growth is to decouple from broad growth. Monumental growth is not priced in.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.