As the world grapples with an acute energy shortage, more attention than ever is focused on boosting the supply of power. The US in particular is taking significant steps to address energy supply shortages whilst also taking a step-change in the decarbonisation of its economy.
The Inflation Reduction Act (IRA), recently signed into law by President Biden, will rapidly accelerate the pace of energy transition in the US and create significant opportunities for companies with the solutions and technologies to address climate change.
This is not only good news for the planet but also for the companies that the Fidelity Sustainable Global Equity Fund invests in.
Taking the US from a laggard to a leader
It's hard to overstate the scale of the bill's incentives, with close to $400bn provided to fund climate change and decarbonisation investments. For the US, which has lagged Europe over recent years in cutting carbon emissions, it is transformational. And that means it is transformational for everyone.
The US is the world's largest economy and second largest carbon emitter, meaning that US climate leadership is essential if we are to come close to meeting the Paris Agreement goals of a 50% emissions reduction by 2030. With the incentives outlined in the IRA, US emissions are expected to fall by around 40%, bringing the potential to align with the Paris Agreement within reach.
To put that reduction in context, it is equivalent to eliminating the emissions of California and Florida altogether.
Renewable energy in focus
The IRA heavily favours incentivising new, clean technology over penalising existing high-emitting sectors. It does this through a wide range of tax credits designed to lower the cost of commercial clean technologies and expand production capacity.
Perhaps the biggest beneficiary of the bill is renewable energy, with significant tax credits to incentivise the development of more solar, wind, battery storage and hydrogen infrastructure. Annual capital investment in wind and solar is expected to reach almost $600bn by 2035, a five-fold increase compared to pre-IRA policy1. The act aims to help install 950 million solar panels, 120,000 wind turbines and 2,300 grid-scale battery plants by 2030.
This means that by 2030, clean generation is expected to contribute more than 80% of the US's electricity demand, along with a more than 80% reduction in electric power air pollutants and a $112 cut to average household energy bills2. That's a win-win for the planet and for consumers.
Creating opportunities for sustainable investments
The bill will stimulate significant investment in renewable energy generation over the next decade. This means opportunities abound for investors in companies with exposure to the renewable energy value chain, and Fidelity's Sustainable Global Equity Fund is no exception.
Investments in companies involved in clean energy generation, distribution and storage account for around 16% of the fund3. Investments in companies facilitating infrastructure decarbonisation, another clear beneficiary of the bill, account for a further 12%.
Two very clear beneficiaries owned in the fund are Quanta Power and Ørsted.
Quanta Power is the largest utilities contractor in the US, responsible for installing a significant portion of the US's clean energy infrastructure. It is the "picks and shovels" of the renewable energy industry - the trillions of dollars earmarked for the build out of wind and solar over the next decade will require Quanta's highly trained skilled workforce to get off the drawing board and into operation. It's not an exaggeration to say that without Quanta, there would quite literally be no energy transition in the US.
Ørsted, meanwhile, is the largest offshore wind operator and developer in the world. It has built more offshore wind farms than any other developer in the world, including the world's first and the world's largest. Ørsted stands to benefit from the expansion of federal land that will be opened up to offshore wind development, as well as the benefit of tax credits throughout the supply chain that are likely to further reduce the cost of offshore wind and therefore increase cost competitiveness and ultimately demand.
Perhaps some of the boldest areas of the IRA are around incentives for green hydrogen (hydrogen produced using renewable power) and carbon capture and storage. However, whilst these areas hold great promise for the future, they are still nascent industries with no established, profitable businesses, which makes them too early for us to invest in today.
The first step in a long journey
The IRA is a bold step forward that will step-change the decarbonisation of the US economy. However, it is only the first step on a long journey to reach net zero. We expect further policy incentives over time to continue driving investment into renewable energy and decarbonisation, which is why we find the investment opportunities in this area so compelling.
The good news is that this is not a zero-sum game. What is good for the environment and our planet is also good for innovative companies and ultimately their investors. Doing good whilst generating investment returns really is possible.
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Sources and footnotes:
1). RepeatProject.org, The Climate and Energy Impacts of the Inflation Reduction Act of 2022, August 2022
3). 15.7% of NAV, rescaled to exclude cash
This post is funded by Fidelity International
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