SOLR - Gems In The EU Energy Supply Chain
2023-04-04 10:00:00 ET
Summary
- We believe the ongoing build-out of alternative energy infrastructure could continue to offer compelling opportunities for long-term investors.
- Russia’s invasion of Ukraine has accelerated the EU’s alternative-energy transition as the common economic area looks to limit its reliance on Russian oil and gas.
- One goal of the new policy push is that EU factories must supply 40% of clean energy manufacturing demand by 2030.
By Brian Faleiro, CFA
While capital goods suppliers tend to suffer in economic downturns, we believe select small caps serving the EU alternative-energy sector could buck the cycle.
There are economic cycles, and then there are secular trends. As persistent inflation and sustained elevated interest rates point to a cyclical economic slowdown, we believe the ongoing build-out of alternative energy infrastructure - fueled by substantial financial commitments from the EU - could continue to offer compelling opportunities for long-term investors.
For those who haven't been keeping score: In 2020, the EU approved the "European Green Deal" stimulus, with the goal of achieving a "climate neutral bloc" by 2050. To support that effort, the InvestEU Programme aims to marshal $372 billion of public and private investment - in part through EU budget guarantees - between 2021 and 2027 1 . Russia's invasion of Ukraine has accelerated the EU's alternative-energy transition as the common economic area looks to limit its reliance on Russian oil and gas.
The next phase, launched in mid-March, is the EU's Net Zero Industry Act (NZIA), accompanied by the European Critical Materials Act (CRMA). The NZIA sets ambitious 2030 manufacturing targets for wind, solar, and batteries, among other technologies, while the CRMA aims to ensure that manufacturers have sustainable access to critical raw materials required for fabrication. The EU also reformed its "Electricity Market Design" guidelines, adding measures to incentivize longer-term agreements with alternative power producers. Increased state aid for clean hydrogen production is in the mix, too.
As with the U.S. Inflation Reduction Act (IRA), the flurry of EU energy-transition initiatives - representing perhaps tens of billions of dollars in future expenditures - have been designed to bolster homegrown capital goods suppliers. One goal of the new policy push is that EU factories must supply 40% of clean energy manufacturing demand by 2030, while other proposals seek to accelerate the permitting process in light of the bloc's burdensome regulations - all of which, in our view, appears to offer significant growth opportunities for smaller, nimble equipment suppliers and service providers.
While we acknowledge a broader cyclical slowdown might be on the horizon, we believe select smaller-capitalization manufacturers in the EU stand to gain from this fundamental and strongly supported shift toward renewable energy.
Source: (1) European Union website, press release March 21, 2022
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Gems In The EU Energy Supply Chain