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Renewable Energy: Green Shoots for a Green Revolution

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Renewable Energy: Green Shoots for a Green Revolution Renewable Energy: Green Shoots for a Green Revolution Fidelity Webcast STEWART GLICKMAN, CFA, SENIOR EQUITY ANALYST, CFRA ANDRZEJ TOMCZYK, EQUITY ANALYST, CFRA PAIGE MEYER, SENIOR EQUITY ANALYST, CFRA APRIL 7, 2021 www.cfraresearch.com Independent Research, Indispensable Results PAGE 1 Welcome Renewable Energy: Green Shoots for a Green Revolution Stewart Glickman, CFA Andrzej Tomczyk Paige Meyer Senior Equity Analyst Equity Analyst Senior Equity Analyst CFRA CFRA CFRA Independent Research, Indispensable Results PAGE 2 Agenda 1 Why Renewables Now? 2 Renewable Energy Today 3 Innovation: What are the Moonshots? 4 Lessons from the European Experience 5 Renewable Energy Growth Drivers 6 U.S. Utilities – Renewables Leaders & Laggards 7 Renewables Disruption to Fossil Fuels Independent Research, Indispensable Results PAGE 3 Why Renewables Now? Stewart Glickman, CFA Independent Research, Indispensable Results PAGE 4 Renewables Have Momentum A Few Years Changes A Lot IEA Medium-Term Report (October 2016) IEA Medium-Term Report (November 2020) Renewables are expected to Renewables are expected to meet cover more than 60% of the 99% of the global electricity increase in world electricity demand increase during 2020- generation over the medium 25…By 2025, the share of term, rapidly closing the gap renewables in total electricity with coal. generation is expected to be 33%, surpassing the coal-fired generation. Source: International Energy Agency (IEA) Independent Research, Indispensable Results PAGE 5 ETF and Mutual Fund Managers are Paying More Attention AUM tied to ESG factors is rising, especially to climate/carbon ESG Investing Trends, 2014-2020 Top ESG Criteria AUM, 2020 ($T) $18.0 35% $16.0 30% Climate Change/Carbon $4.18 $14.0 $17.1 25% $12.0 $10.0 20% Anti-Corruption $2.44 $12.0 $8.0 15% $6.0 $8.7 10% Board Issues $2.39 $4.0 $6.6 5% $2.0 Sustainable Natural $2.38 $0.0 0% Resources/Agriculture Start of 2014 Start of 2016 Start of 2018 Start of 2020 Executive Pay $2.22 Assets Under Management ($T) tied to ESG Strategies - left axis % of all Assets Under Management - right axis $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 Source: US SIF Independent Research, Indispensable Results PAGE 6 Big Energy Companies are Paying More Attention Too Notice ExxonMobil’s Abrupt Shift Starting in 2019 Energy ETF Comparison XOM Quarterly Earnings Calls ICLN vs. XLE No. of References to Key Terms, 2018-2020 160.0% 140.3% 180 140.0% 160 120.0% 140 100.0% 120 80.0% 100 60.0% 42.3% 80 40.0% 60 20.0% 4.7% 40 0.0% 20 -20.0% -11.4% -20.6% 0 -40.0% -36.9% 2018 2019 2020 -60.0% 2018 2019 2020 Permian Low carbon/emission or variant Renewable, wind or solar ICLN Share Performance XLE Share Performance Source: S&P Global Market Intelligence Note: Low carbon/emission includes related terms such as carbon capture, low carbon, carbon tax Independent Research, Indispensable Results PAGE 7 Renewable Energy Today Andrzej Tomczyk Independent Research, Indispensable Results PAGE 8 Types of Renewable Energy Geothermal Hydropower Wind Solar Biomass Source: U.S. Department of Energy, Office of Energy Efficiency & Renewable Energy Independent Research, Indispensable Results PAGE 9 Renewable Electricity Generation by Source Hydropower, geothermal, and solar thermal are stagnant while wind and solar PV grow exponentially Renewable Generation by Source Incremental Capacity Since 1990 400 350 350 300 300 250 250 hours - 200 hours 200 - 150 150 Terawatt 100 Terawatt 100 50 0 50 1990 1995 2000 2005 2010 2015 2019 Hydro Wind Solar PV 0 Geothermal Solar Hydro Solar PV Wind Geothermal Solar thermal thermal Source: CFRA, International Energy Agency (IEA) Independent Research, Indispensable Results PAGE 10 Renewable Energy vs. Other Fossil Fuels The U.S. still relies heavily on fossil fuels, but retiring coal will mean excess renewables’ growth United States Electricity Generation by U.S. Electricity Demand vs. Renewable Source, Terawatt-hours Supply, 2019-2025 450 Natural Gas 400 Coal 350 300 Nuclear 250 200 Wind 150 Hydro 100 50 Solar PV 0 Total Electricity Demand (terawatt-hours) 0 1,000 2,000 3,000 4,000 5,000 Renewable Energy Supply (terawatt-hours) 2010 2015 2019 Source: CFRA, IEA Independent Research, Indispensable Results PAGE 11 Recent Trends Renewable energy markets demonstrated their resiliency amid the Covid-19 pandemic Generation Growth, 2019 to 2020 Index 1 Year Returns* 20.00% 15.00% S&P 500 49% 10.00% 5.00% 0.00% S&P 500 Independent Power & Renewable 93% -5.00% Electricity Producers -10.00% -15.00% NASDAQ OMX Solar 175% -20.00% Index NASDAQ OMX Wind -25.00% 70% Total Electricity Renewable Coal Generation Index Generation Generation Source: CFRA, S&P Global Market Intelligence Source: CFRA, EIA *March 25, 2020, 2020 through March 25, 2021 Independent Research, Indispensable Results PAGE 12 Innovation: What are the Moonshots? Andrzej Tomczyk Independent Research, Indispensable Results PAGE 13 Renewable Energy - How do we get there? Increasing R&D needed to enable innovations in clean energy technologies U.S. PUBLIC ENERGY R&D ALLOCATION, 2019 Storage and other Hydrogen and Fuel Power Technologies Cells Energy Efficiency Fossil Fuels 28% 1 Energy Storage 16% Carbon Capture, Utilization, 2 and Storage Renewable Energy Sources Nuclear 22% 28% Source: CFRA, IEA Independent Research, Indispensable Results PAGE 14 Energy Storage is Critical If renewables are going to displace fossil fuels, efficient energy storage will play a large role U.S. Storage Energy Capacity 0.25 (billion kilowatt-hours) Competing Technologies hybrid storage 0.20 stand-alone storage Lithium-ion batteries 0.15 Flow Batteries Pumped hydro 0.10 Compressed air 0.05 Hydrogen 0.00 2020 2025 2030 2035 2040 2045 2050 Source: EIA Independent Research, Indispensable Results PAGE 15 Carbon Capture, Utilization, and Storage (CCUS) CCUS is largely considered too expensive, but project development has been on the rise since 2018 Global CCUS Facilities Operating and in Development 70 60 50 40 30 20 10 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Early Development Advanced Development Under Construction Operating Source: CFRA, IEA Independent Research, Indispensable Results PAGE 16 Lessons from the European Experience Paige Meyer Independent Research, Indispensable Results PAGE 17 Lessons from Europe Europe is ~10 years ahead of the U.S. in the green energy transition European Union— Share of renewable energy in gross final energy consumption (%) 20 18 U.S. 2019 16 14 12 10 8 6 Share of renewable ofShare (%) renewable energy 4 2 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: CFRA, Eurostat, U.S. Energy Information Administration Independent Research, Indispensable Results PAGE 18 Lessons from Europe Orsted A/S’s valuation surges 255% since IPO in June 2016 35X 18 30X 16 14 25X 12 20X 10 15X 8 6 (DKK/share) 10X 4 5X 2 Ørsted A/S's Annual Diluted EPS 0X 0 Enterprise Value/EBITDA Forward Enterprise Ørsted A/S (CPSE:ORSTED) - TEV/Forward EBITDA [left axis] S&P Europe Ex-Switzerland LargeMidCap Utilities (Industry Group) Index - TEV/Forward EBITDA [left axis] Ørsted A/S Normalized Diluted EPS [right axis] Source: CFRA, S&P Global Market Intelligence Independent Research, Indispensable Results PAGE 19 Lessons from Europe Renewable electricity providers performance outpaces established utilities Five-year EPS CAGR (2016A-2021E) Renewable Electricity 112.5% Electric Utilities 4.2% Multi-Utilities 3.8% Gas Utilities 3.3% Water Utilities 2.1% Indep. Power Producers -3.8% -50% -30% -10% 10% 30% 50% 70% 90% 110% 130% Source: CFRA, S&P Global Market Intelligence. Data as of March 25, 2021. Independent Research, Indispensable Results PAGE 20 Lessons from Europe Renewable electricity sub-industry is rewarded by the market, while Electric valuation widens Median Forward P/E Current Median Price/ 2021 Premium (Discount) vs. 10- Sub-Industries Earnings Year Historical Forward Average Renewable Electricity 36.5 25% Electric Utilities 16.3 36% Multi-Utilities 15.3 7% Gas Utilities 15.5 17% Water Utilities 19.4 5% Independent Power Producers 17.1 22% S&P Europe Ex-Switzerland LargeMidCap Utilities (Sector) 16.7 19% Index Median Source: CFRA, S&P Global Market Intelligence. Data as of March 25, 2021. Independent Research, Indispensable Results PAGE 21 Global Renewables Scoreboard Leaders: Entities with the most renewables assets Source: CFRA, S&P Global Market Intelligence. 2019 data. Independent Research, Indispensable Results PAGE 22 Renewable Energy Growth Drivers Andrzej Tomczyk Independent Research, Indispensable Results PAGE 23 What’s Driving Renewable Energy? 1 U.S. Public Policy 2 ESG Investing Trends 3 Better Economics Source: CFRA Independent Research, Indispensable Results PAGE 24 Utility-Scale Policies & Programs Some states have better clean-energy incentives than others; are we due for more federal policy? Top 10 States for Utility-Scale Solar PV Capacity Additions (Gigawatts) California North Carolina Florida Nevada Texas Arizona Georgia Utah Minnesota New Jersey 0 2 4 6 8 10 12 2015 and Earlier 2016 2017 2018 2019 Source: CFRA, Energy Information Administration (EIA) Independent Research, Indispensable Results PAGE 25 Utilities Operating in Favorable Solar Jurisdictions Five-Year Solar Capacity / Premium State Utility Company Forward P/E* Average Total Capacity (Discount) Forward P/E NextEra Energy Florida 17.8% 29.5x 23.9x 23.0% (NEE) PNM Resources Texas 10.0% 21.2x 21.4x (0.01%) (PNM) Emera Incorporated Florida 6.7% 19.6x 18.0x 8.9% (EMA) Duke Energy North Carolina 5.1% 18.4x 17.6x 4.5% (DUK) The Southern Company Georgia 3.3% 18.6x 17.3x 7.5% (SO) Pinnacle West Capital Arizona 3.1% 16.1x 18.2x (11.5%) (PNW) Xcel Energy Minnesota 1.9% 22.3x 20.7x 7.7% (XEL) Edison International California 1.9% 13.4x 15.5x (13.5%) (EIX) ALLETE, Inc.
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