Turbulence on the Path to Transformation

Executive Summary

Despite substantial growth and huge advancements in public policy support, clean energy has had an abysmal stretch in the stock market the last two and a half years. In this paper, we will discuss some of the factors that have led to this discrepancy, how we approach investing in this tricky sector, and why we are so optimistic about the outlook for clean energy going forward.

The drop

Clean energy over the last few years looks suspiciously like one of Jeremy Grantham’s bubbles (see Exhibit 1). After outperforming the MSCI All Country World Index (ACWI) by more than 200% over 2020 and the beginning of 2021, the Wilderhill Clean Energy Index lost all that alpha and then some through the end of last month, as it dropped over 70% in absolute terms from its February 2021 peak.


A few factors have played into the poor performance. February 2021 marked the end of a tremendous stretch for clean energy, and valuations in the sector priced in optimal conditions. Optimal conditions, unfortunately, rarely persist, and the combination of inflation and rising interest rates helped to drive the downturn. After more than a decade of declines, solar and wind costs rose due to materials inflation and supply chain issues (see Exhibit 2). The government then raised interest rates to combat inflation and rising/high interest rates make clean energy projects more expensive to finance and less attractive as future cash flows are discounted at a higher rate. Rising rates also helped drive a revaluation of growth stocks, and clean energy companies got caught up in the broader growth unwind.


Over the past year, the Inflation Reduction Act (IRA) has also impacted clean energy performance but perhaps not in the way one might expect. The IRA is a landmark legislative package of clean energy incentives that will spur investment over the long term. However, over the short term, the IRA has led to project delays as people await finalization of the package’s details by the government. Public policy changes often pull demand forward, but in this case, demand has been pushed into the future.