The Need for Speed
Speed to market is an important consideration. In the US, for instance, AI is substantially increasing power demand at a time when significant amounts of coal-fired power generation are being retired: the vast majority of coal plants are too old and costly to run. Wind and solar are often the only viable replacements for two reasons: first, they can come onstream fastest; and second, even without subsidies, they are cost-competitive—when paired with battery storage—versus carbon-based alternatives. In addition, equipment costs are the lowest they’ve ever been, and the cost of producing clean power continues to fall across the globe.
All else equal, a loss of government subsidies for renewables would make gas relatively more attractive. But wind and solar would remain viable just based on economics, in our view. We also believe the new US policies will likely be less damaging than feared for low-carbon solutions. In particular, we don’t expect a full repeal of the Inflation Reduction Act (IRA) which provides significant federal funding / tax incentives across renewables, other clean technologies and electricity transmission. (The IRA has created many jobs across the US, too.) State-level and utility spending will also likely remain robust, favoring utility-scale, commercial and industrial, and community projects.
Look Beyond Familiar Investment Opportunities
Of course, the path to renewable profits and returns hasn’t been smooth. For example, some renewable developers have been badly hurt by post-COVID interest-rate rises and cost inflation, and even at current share price levels we believe investors should be highly selective in this subsector. But the scale and breadth of developments in the power transition are often underestimated, in our view. We think these dynamics are creating major opportunities in electrification and energy efficiency.
Energy Infrastructure Needs Upgrading
Upgrading and reinforcing electricity grids will be a particularly important focus. In the US and across the developed world, grids are approaching or have exceeded their planned life but need to carry massively increased loads, especially considering AI-related power demands and the increasing need for grid resilience to mitigate climate, geopolitical and other risks.