Jamie Melrose
Looking to 2025, we expect that President Trump will struggle to make substantial reforms to the IRA and will enjoy more success using his executive powers to promote fossil fuels. Republican support for the jobs and investment coming from the act may restrain Trump's ability to repeal it, and the final outcome may well be that Trump's election is more positive for fossil fuels via lower regulation and environmental protection than it is negative for clean energy directly.
Jonathan Waghorn
Politics aside, US electricity demand will continue to surge due to artificial intelligence querying, data centres, reshoring and the broader trend of electrification. Significant grid upgrades, a record interconnection backlog and skilled worker and product shortages will keep this market, which has seen little growth in the last 20 years, very tight, benefiting equipment manufacturers and contractors. Globally, renewable power generation is expected to grow 7 to 8% in 2025.
Jamie Melrose
Clarity from Trump and these electricity supply demand realities will allow US industry to address its substantial backlog of IRA related investments. In stark contrast, we see further rapid growth in China as renewable energy was again listed among strategic industries whose development is expected to receive long term policy support from policy makers.
Jonathan Waghorn
Electric vehicle sales will grow, reaching 20 million in 2025. And if current adoption S curves are followed, then EV's will make up 80% of new vehicle sales in China and Europe by 2030, with the US reaching that level in 2035 as they become cheaper to buy, cheaper to run, and cheaper to maintain. Lithium ion battery prices likely to deflate around 5% in 2025, reaching $70 per kWh in 2030, if learning rates are continuing to hold.
Jamie Melrose
Solar will remain at the bottom end of the renewable cost curve and installations will grow across all major geographies in 2025, reaching around 670 gigawatts of installations. China will be around half the market with North America and Europe seeing demand increases due to the desire of hyperscalers, for quick to market 0 carbon electricity with long term price visibility.
Jonathan Waghorn
Wind installations will reach a record level of around 145 gigawatts. China being less than half of the market, faster permitting and raw material cost deflation will support the outlook for growth and margins. Installations will continue to grow to around 200 gigawatts by the end of the decade.
Jamie Melrose
We expect the energy transition to continue to progress and the multi decade positive outlook still remains. However, within this secular trend, there are cycles at play, some at which are in an up phase like electrical equipment, building material and grid investment and some which are in a down phase; batteries, EV’s, solar upstream. We're confident in the structural growth offered by the transition and believe that the challenged industries are at or close to cyclical troughs.
Jonathan Waghorn
With the US election behind us, we look to a reduction of financing costs, i.e. interest rate reductions feeding into consumer and project financing to drive investment in the clean energy space. Together with growing AI and data centre demand, stricter energy efficiency requirements, massive grid upgrade programmes and the implicit operating leverage within some of our manufacturing investments, we believe that confidence in portfolio earnings will start to improve from a low level.
Jamie Melrose
The consensus derived earnings per share growth outlook for the fund sits at a premium of nearly 6% per annum versus the MSCI World Index. We don't think that the 26% one year forward P/E discount of the fund reflects this earnings scenario, but instead something that is worse than that implied by the current interest rate and inflationary environment. If valuations don't improve, we would expect to see continued high levels of M&A activity in the sector. We believe that the Guinness Sustainable Energy portfolio of 30 broadly equally weighted positions chosen from our universe of around 250 companies provides concentrated exposure to the theme at attractive valuation levels.
