Ninth Annual Sustainability & Energy Transition Primer

The TD Cowen Insight

We have created our ninth annual comprehensive primer on the Sustainability & Energy Transition sector to assist investors in navigating its complex and varied sub-verticals. Given the improving unsubsidized economics, we remain bullish on long-term prospects but see the 2024 U.S. election dampening investor sentiment.

Our Thesis:

We have compiled a primer on the sector. We see the group as well positioned for long-term investors, but we acknowledge near-term challenges including the 2024 U.S. election, elevated interest rates and lower fossil fuel prices may weigh on near-term sentiment. For the first time in 20 years, the U.S. is facing elevated electricity load demand stemming from Artificial Intelligence (AI), Electric Vehicles (EVs), and reshoring of manufacturing, which should drive more renewable growth. Historically, the two primary challenges facing our coverage were availability of low-cost capital coupled with cost declines needed to be competitive with the grid. As sustainability investing has surged, the availability of capital is no longer a problem either at the corporate or project level; however, rising rates have impacted near-term trends in 2023-2024, which we see as transitory given the cost of power from renewables is set to continue to decline.

What Is Proprietary?

Seven TD Cowen senior analyst teams, including three from Canada, spanning various industries and our Washington Research Group Sustainability and ESG policy analyst, collaborated to form a comprehensive view of the sustainability and energy transition ecosystem, current key themes impacting stock performance, and potential investment considerations for stakeholders. Within this report, we analyzed the cost competitiveness across renewable energy sources, their viability of commercialization and the related infrastructure needed for adequate implementation on a global scale. Passage of the Inflation Reduction Act (IRA) in 2022 seemingly served as an investment catalyst that is starting to play out and stimulating growth, especially in non-solar industries.

Financial & Industry Model Implications:

Our forecasts consider the increasing need to leverage technology (both networking and software) that manages distributed energy resources (DERs), and the key pillars of grid modernization needed to better manage the US$3 trillion global electricity market. Within the report we outline key drivers and forecasts by industry to form our overall sector view.

What To Watch:

Looking ahead, we see four themes within the energy transition playing out:

1. The evolution of traditional hydrocarbon firms over multiple decades as the overall need for fossil fuels declines;
2. An increase in renewable energy's share of energy mix as new and lower cost technologies continue to evolve;
3. Grid improvement to better handle an increase in intermittent power supply and more electrified solutions in AI data centers, heating and transportation;
4. Further adoption and evolution of newer technologies like hydrogen and carbon capture and sequestration.