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Cleantech arms race is ‘good for climate’

Good morning from New York.

We are in an era of global cleantech competition. The US is determined to “reshore” its supply chains, break dependence on China, revitalise its industrial heartlands and create jobs. Oh, and it wants to do all this while slashing emissions and driving down energy costs. Can it work? Mitsubishi Heavy Industries’ US boss isn’t so sure, as Amanda reports today. Other investors are much more sanguine. Scott Jacobs, chief executive of clean energy investor Generate Capital, is one of them. We interviewed him: see note one.

In Data Drill, Myles reflects on the ever-shrinking shale rig count, and how it connects to the latest takeover in the sector.

And don’t miss Martin Wolf on the need to provide green financing for developing countries.

Thanks for reading — Derek

‘Global arms race is good for climate’, says Generate Capital boss

Laissez-faire economic policy is out, industrial policy is in.

When President Joe Biden passed lofty subsidies to build out a clean energy economy in the Inflation Reduction Act last summer, officials in the EU and Canada scrambled to follow suit, even as the Canadian natural resources minister warned against a global “subsidy war”. Meanwhile, the Biden administration has spoken openly about a cleantech “race” with China.

According to Scott Jacobs, chief executive of Generate Capital, this new era of government intervention and multinational competition is a win for the climate. Generate invests in projects from microgrids in Texas to solar in New York and green hydrogen to battery storage, and has raised more than $8bn to invest in the energy transition since it was founded in 2014.

“Europeans are in a race against the Americans who are in a race against the Chinese,” Jacobs told Energy Source. “The arms race to build climate tech industries and all of the necessary value chains . . . for decarbonisation is a good thing when you care about the climate.”

“And for us, as a buyer of stuff, it’s a good thing too, because we will have more options. And we’ll have effectively more buyer power and things should get cheaper.”

That was among the points Jacobs raised in an interview with us last week. Here are other key points from the discussion. 

‘No trade off’

Several clean energy executives have raised concerns that trying to wean the US off Chinese supply chains and parts while also attempting to boost domestic manufacturing will slow the clean energy shift — and make it more costly.

Jacobs, however, sees “no trade-off” in what some have dubbed a “decarbonisation versus deglobalisation” debate.

“I think they are one and the same. We need to create a lot of jobs to rebuild the world to save humanity from itself with the climate,” Jacobs said. “It would be imprudent for us to try to distinguish one factor from another.”

‘Huge slowdown’

The IRA’s 10-year timeframe for tax credits gives developers confidence that the subsidies won’t run out before new projects turn a profit.

But the greater long-term certainty for the industry hasn’t escaped deteriorating market conditions, said Jacobs, adding that a slowdown in capital allocations began last summer as inflationary fears started to bite.

“We are in a capital intensive part of the world . . . You see a huge slowdown in capital formation around private equity generally, and that certainly affected the sustainability market,” Jacobs said. Still, cleantech projects continue to garner lots of capital and remain more protected from macro conditions compared to other markets.

“Real assets are continuing to get funded because real assets have real customers and real cash flows.”

Generate recently announced an investment in green hydrogen producer Ambient Fuels, including $250mn committed to building and operating new infrastructure.

‘We’ve never asked for policy to solve our problems’ 

Despite worsening macro conditions and a looming presidential election, Jacobs is a big believer that the economics of clean energy will prevail.

“The amount of inflation that has happened has not made these solutions less competitive,” Jacobs said. “We’ve seen solar continue to be the cheapest form of power in the world. Wind is the second cheapest form of power in the world, and that has not changed with a year’s worth of inflation.”

The upcoming presidential election has also raised alarm among clean energy advocates that a change in administration could threaten the IRA’s implementation and curb the country’s climate efforts.

But Jacobs said he is not worried, noting that the four-years under ex-president Donald Trump were record years for renewable deployment.

The IRA was “the most important piece of climate-related legislation we’ve ever seen in the United States”, he added, but the rise of the clean energy sector was under way long before the law was passed by Congress last August. “The folks who are driving decarbonisation or the energy transition are our customers, because they weigh the economic benefits”, Jacobs said.

“Economics play a pretty darn big role in this equation,” he said. “We’ve been focused on the economic value proposition of these solutions for 10 years. We’ve never asked for policy to solve our problems.” And it would be some time before the IRA was fully implemented.

Jacobs added: “We invested $2bn last year, none of which had anything to do with the IRA.”

(Amanda Chu and Derek Brower)

Data Drill

Civitas Resources made a splash this week by barrelling into the Permian Basin — Texas and New Mexico’s prolific oilfield — with a brace of acquisitions totalling $4.7bn to become yet another public operator gobbling up private rivals.

The trend is bad news for those betting on another leap in production growth from the shale patch.

Banned by Wall Street from even hinting at a return to the drilling binges of the shale revolution’s glory days, public companies have instead been cannibalising their private counterparts — a way to expand using their cheque books, not their drill bits.

In January, New York-listed Matador Resources snapped up private equity-backed Permian basin driller Advance Energy for $1.6bn. Public operator Ovintiv bought $4.3bn worth of assets from private equity group Encap Investments in April.

Private operators — free from Wall Street’s nagging insistence on frugality — have been the ones driving recent production expansion, accounting for almost two-thirds of growth over the past two years, according to consultancy TPH & Co.

As public companies move in on them that growth is dwindling. As is rig demand. One in every eight rigs operating at the beginning of the year has been taken out of action, leaving just 687 active at the end of last week — the lowest since April last year.

“We continue to view consolidation of private operators by public companies as a positive from a macro perspective for the upstream sector, as it will continue to reduce [production] growth from the market,” said TPH’s Matt Portillo. In other words, fewer drillers, fewer barrels — keeping the price elevated.

That’s already proved to be Civitas’s move. With the new drillers in hand, the bigger company would have seven rigs in the field. Chief executive Chris Doyle wants to cut that to four.

“Very simplistically, as we think about how do we optimise free cash flow, keep production broadly flat year-over-year — we think a couple of rigs in each of the basins is where we’ll begin,” he told analysts.

(Myles McCormick)

(Myles McCormick)

Power Points

Energy Source is written and edited by Derek Brower, Myles McCormick, Amanda Chu and Emily Goldberg. Reach us at energy.source@ft.com and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.

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