The outlook for the Energy Transition universe in a higher-rate environment
Given recent significant increases in interest rates and subsequent declines in Energy Transition-related equities, we examine the various implications of higher rates on this sector. Our Perspective discusses how interest rate movements have affected Energy Transition markets so far, the positive impacts higher interest rates can have on project economics in this sector, where we are seeking upside, and why we believe now is the time to selectively add long exposure to our portfolio.
The Unexamined Impact of Interest Rates
It is common to see components such as copper, lithium, silicon, glass, steel, solar panels, wind turbines, inverters, and batteries touted – and rightly so – as core materials fueling the Energy Transition, the global shift from fossil-based systems to clean sources of energy. However, we have always recognized another factor as the most critical raw material in this transformation: interest rates.
In both historically low-interest rate environments like 2021 and higher-rate environments like today, interest rates have always and will always affect the Energy Transition. Like all power and infrastructure assets, Energy Transition projects require sizeable upfront funding to capture long-term, contracted cash flows from their output. Whether utility-scale wind and solar, residential solar, geothermal, renewable diesel and natural gas, or hydrogen, these capital-intensive assets are financed upfront with a combination of project debt and tax credit monetization. Given this upfront leverage, interest rates impact project cash flows, the present value of those cash flows, and the amount of debt that projects can support.
In our view, this dynamic factor has been either overlooked or misunderstood by most market participants since we began investing in this universe nearly twenty years ago. Relegated to an afterthought for the past ten years or so, and elevated to a subject of cocktail party chatter in recent months, interest rates and their impact on the Energy Transition deserve a robust discussion, particularly considering the headwinds gusting against equity prices in our universe this year.
The Macroeconomic and Market Landscape
Thanks to rising inflation and the Federal Reserve’s efforts to combat it, combined with worries about soaring fiscal deficits, the yield on the U.S. 10-Year Treasury Bond has dramatically…
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Disclosures: This report is provided for informational purposes and does not constitute an offer or a solicitation to buy, hold, or sell any partnership interests in Satori funds or in any other security. Offers are made only pursuant to a definitive Private Placement Memorandum (“PPM”) and subscription documents for the Satori funds, which contain detailed information concerning the investment terms and the risks, fees and expenses associated with an investment in those funds. Securities of Satori funds are not registered with any regulatory authority, are offered pursuant to exemptions from such registration, and are subject to significant restrictions. In the case of any inconsistency between the descriptions or terms in this document and the PPM, the PPM shall control.
About the Author
Paul Strigler is chief investment officer of Satori Environmental, a long/short equity strategy that primarily invests in securities impacted by the global energy sector’s shift from fossil-based systems to renewable sources. Paul leverages his deep sector expertise, rigorous financial modeling, and robust network to identify catalysts and evaluate opportunities within a proprietary investment universe designed to capture the sector’s most important megatrends. Prior to joining Satori, Paul spent nearly 18 years at a Boston-based hedge fund manager, where he began investing in renewables in 2004 and helped launch the longest-tenured renewables-dedicated hedge fund in the world in June 2009. Over his 12-year tenure, that fund delivered strong, industry-leading absolute returns and significantly outperformed sector benchmarks. Previously, Paul was a strategy consultant at L.E.K. Consulting and held analyst roles at Credit Suisse First Boston and J.P. Morgan. Paul earned his B.A. in economics, with honors, from the University of Chicago and a general course degree in economics from the London School of Economics and Political Science.
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