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Spotlight on Solar

Spotlight on Solar

Invesco's Head of Thematic Strategy discusses solar.

Spotlight on Solar
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Aired May 03, 2023
Invesco's Head of Thematic Strategy sheds light on how to think about solar within the renewable energy ecosystem.

Kinsey Grant: Hello everybody and welcome once again to the Public Podcast. I'm your host Kinsey Grant. Today's show is brought to you by SinglePoint, a renewable energy and sustainable lifestyle company. And I'm so excited to welcome our guests, which I will do in just a minute, to give you a quick heads up on what we're gonna be talking about today. We have some major big time investing themes coming at you in today's edition of the Public Podcast. We're talking solar as a category within the renewable sector, which is obviously very interesting to, I'm sure, tons of you who are listening to this right now. We're gonna be talking about what solar means for the broader renewable sector, about some of the companies that make up the solar value chain. We're gonna be talking about the Inflation Reduction Act. And of course, throughout all of this, the ways that you as investors can potentially add this theme to your portfolio and hopefully learn a lot. So to do all of that, I'm super excited to welcome our wonderful guest today. Rene Reyna, the Head of Thematic ETF Product Strategy at Invesco. Rene, welcome to Public Live.

Rene Reyna: Hi Kinsey, great to be here.

Kinsey Grant: Yeah, super excited to jump in today. We have, like I mentioned, a lot to cover. So if you're ready, we'll get right into it.

Rene Reyna: Works for me. I'm excited.

Kinsey Grant: All right, me too, me too. Okay, so Rene, I wanna start here with kind of the big picture. We are definitely going to get into the Inflation Reduction Act stuff, which has obviously been a huge moment for renewables as a sector. We'll get to that during this conversation, but before we get there, I would love to talk about solar as it fits into renewables as a broader sector in investing in the economy. Tell me a little bit about how solar is tracking within the renewable sector right now.

Rene Reyna: Yeah, sure. So, you know, if it's okay, maybe just take a step back and, you know, just think of renewables or clean energy in the sense of this energy transition that's taking place. And so, you know, I think we all recognize what are the drivers there. So one, you got climate change. You know, the science does demonstrate that the burning of fossil fuel does have a major impact to the air we breathe, right? And so there's the negative impacts associated with the environment. There's negative impacts associated with human health. And then there's the economic impacts that are also a result of some of this climate change. So I think of clean energy, renewable sort of along the sustainability sort of opportunity set, if you will. I think secondly, there's energy security we need to think about. So, you know, the less reliance we have on energy imports, you know, think of the power OPEC has and how that impacts the average consumer, you know, I think renewables can help solve for that. And then there's economic benefits. I mean, if we think about job creation as a result of some of these new transitions that are taking place, the new technology, if you will, and then also the lower energy costs as we create more scale along some of the renewable sources. So it really is exciting what's taking place, renewables. If I look at solar specifically, you know, it's just one important part of the sort of renewable puzzle. And so I think of solar in the context of what are the other renewable energy sources. So, generally speaking, you think about wind, you think about hydro, you think about biomass, and geothermal, and collectively renewables are surpassing US electric generation. For example, we passed nuclear in 2021, we passed coal-fired generation in 2022. So renewables are really having a meaningful impact. The US renewables represent 21, 22% of US electricity generation. Solar is about 3.5% of that, which goes to the question. So solar, as a part of this renewable puzzle, if you will, it is a, it's unique and it's very important. It's widely available, easy to deploy. So we think about the sun as a resource. Clearly, it's a resource that we have available day in and day out. It could be easily installed, so it's flexible. So think about installing rooftops, large solar farms, as an example. I think what's unique about solar, from an investment perspective, is cost. And so if we think about from 2010 to about 2020, we've seen costs of solar installs come down. Now, it hasn't been just a straight line downward. We've seen some pressures and increase in costs the last couple of years. But that in itself, if you think about some of the trade-offs, we go back to early 2000s, a lot of consumers, for example, were not doing the math and saying, hey, what is the breakeven if I want to install a solar panel in my home? And generally, it was about 20 years. And then you fast forward to today, and that breakeven. In a single digit of years. And again, there's a lot of other factors that can go into that. But clearly there's been a lot of advancements. So I think that makes soil unique. The economic benefits and job creation, which I mentioned earlier, if we think about solar jobs in comparison to oil extraction, coal mining, there's actually more US jobs in solar production than there are in those two categories, which I don't think many people realize. So there is this economic benefit. And sort of the last component I think about solar, and I know this is a long answer, so I apologize, but the innovation, the technology around solar. If I think of the solar plus storage, for example, Renova, which is one of the holdings in one of our ETFs, partners with Tesla's Powerwall for installs. The solar battery storage went from saving approximately six minutes worth of energy up to about 10 hours plus today. And so those are some of the factors that I think make solar exciting if I think about renewable energy more broadly.

Kinsey Grant: Yeah, it's a phenomenal way to get started with this conversation. I think that established a ton of the important context that we need to understand why solar and renewables, more broadly speaking, have become a theme that investors might be gravitating toward. And later in the conversation, I do want to make sure we hit on that element of how investors might be able to add solar as a theme to their investing portfolio and to their investing strategy. But even before we get there. I would love to dig in a little bit more to the nitty gritty of the renewable sector, particularly solar. When we're talking about the energy value chain, the solar energy value chain, I'm curious about what has made it such that those prices have come down. We're talking obviously about a lot of different moving parts and elements that come together to create solar as a part of the renewable sector. But I'm curious to hear a little bit more about the industries or the sub-industries that might be contributing to this wider proliferation of solar energy as part of the renewables landscape. What are those elements that are coming together to make solar a more affordable or more accessible option right now?

Rene Reyna: Yeah, so I think in the general sense, or in these terms, is increased utilization, increased technology. And that scalability has helped bring down costs if I think of the solar value chain Specifically, so you know generally the components are you have sort of the production side insulation side you have financing then you have kind of ongoing maintenance and When you think of it from you know, just breaking down some of these segments. So the first component is upstream, so think polysilicon.

Kinsey Grant: Mm-hmm.

Rene Reyna: You know, DocuNew Energy and GCL Technologies, who are the largest players in this space, those polysilicon costs have come down quite a bit. And these materials are used for kind of that midstream area where we think about solar panel manufacturers. So, you know, solar panels are made up of PV cells. They convert sunlight into electricity. So you have solar wafers, solar cells, and solar modules. The companies that played this there would be like Cinco Solar Canadian solar United renewables These are sort of your midstream players. This also includes inverter Manufacture so you have to at some point convert your son into your DC to AC back to DC and so these inverters are Inverse using manufacturers. So think of like the end phases of the world solar edge. These would be considered kind of that midstream category. And then from there, you kind of go downstream. So now start thinking about installers, distributors, some of the utility companies. And Cavus is a big solar utility company. No far energy, if I think about like installations and building out of some of these solar farms, they're a big company in this space. So globally, this sets up sort of this value chain. And so as more commitments to increasing solar utilization, increasing capacity, that has over time driven down cost. When we look at sort of the space and say, well, who are some of the bigger suppliers that are helping, you know, reduce some of these costs? You know, China is the biggest manufacturer when it comes to solar manufacturing, solar parts. And so it's really some of their scale. We looked at China economically a lot for lower manufacturing costs. But collectively, that has brought down some of the costs. And so demand is growing not only in China, it's growing in Europe, it's growing in the US. So all these countries and corporations, for that matter, who are making commitments to reduce their carbon emissions, is all contributing to the scale and that's ultimately bringing down some of those costs.

Kinsey Grant: Yeah, certainly, it certainly makes a lot of sense. And I think this idea of the way that renewables are scaling and solar specifically are scaling right now certainly makes a compelling case for why this cost might be decreasing. This utilization has really picked up and we have reason to believe that it might continue to pick up because of news that has come from DC, from certain industry, but very much DC over the last year or so. I think this is a great segue to talk about the Inflation Reduction Act, which was passed last year, made some pretty landmark provisions for clean energy. I would love to hear your perspective on how the Inflation Reduction Act, commonly referred to as the IRA, how that might've impacted solar. Tell me a little bit more about what the impact has been from that legislation on the solar space. So, I'm gonna go ahead and start with the solar. So, I'm gonna start with the solar.

Rene Reyna: Yeah, so it was huge, in my opinion. You know, I think it just speaks to our commitment, which globally, I think there was some concern. So, you know, not to get into the politics of it, but, you know, it's kind of goes to the timeline. You know, there was a transition from President Trump to President Biden. You know, almost immediately he rejoins the Paris Accord. And so this is sort of the global commitment to reduce, you know, carbon emissions. And then he also had his legislation that ultimately got passed, the Inflation Reduction Act, and it resulted in the largest climate-related bill ever. So $369 billion in spending and green energy tax credits were a result of the IRA. And so in some cases, it extended some tax credits that are already exist. Some listeners maybe heard of the Energy Policy Act that was created back in 2005. And so there were already some subsidies or tax credits that were in place that were sort of being reduced over time. And so this sort of reignited those tax credits, extended them for another 10 years, increased some of those tax credits up to 30%. And so this really helps stimulate this marketplace. And so if I think some of the impact of the IRA specifically, you heard me talk a lot about reducing carbon emissions. So I think this sort of fast tracks the US a little bit. There are various studies out there. I think some of what I read was perhaps it increases our speed by 40 percent in terms of hitting some of these targets by 2030. So I think that was impactful. I think also there were parts of the IRA that included tax credits for production. So there's been a lot of talk, I think we've heard in the news, around on-shoring, so reducing our reliance on other countries and their production. So there was a lot of supply chain issues, for example, that delayed and increased costs recently. And so these new incentives should and actually are enticing companies to produce and manufacture here in the US. So again, I talked about some of the economic benefits around job creation. So that's a positive. And we've seen some of the largest manufacturers. So First Solar, A Solar, you know, they've all committed already to manufacture here in the US. So, you know, this should serve as a stimulus really to this transition. Now again, I think we have to acknowledge the environment we're in today. You know, we have a high inflation and interest rate environment. So we are seeing a little bit of maybe not the quick acceleration that we would like. And I think a lot of it is because now you have consumers, businesses have to make decisions around investments due to the inflation and trade environment. But nonetheless, over the long term, this is viewed as net positive. And I think the one thing I'll say too, and I hope, I just want to emphasize that, because the costs have come down so significantly, because corporations and countries are committing to reducing their carbon emissions, I look at some of these subsidies and incentives as really icing on the cake. And so in other words, I think we were kind of going down this path already, and now you have some, let's call it longer commitments in terms of the US with these tax credits that should help maybe move some of those that were on the fence a little bit about making that commitment, sort of bring them over the line, if you will. So I think it's really exciting and we should see increased solar production as well as solar utilization here in the US over the next few years.

Kinsey Grant: Yeah, it's a great kind of big picture, 30,000 foot view of what's going on in solar. And it's certainly helpful to hear the context in the background around how this very much talked about legislation is actually going to come to fruition with the economic realities that we're all facing today. So now that we have gotten that big picture, that kind of zoom out view of what's going on in solar, I would love to talk a little bit about the more micro, how can investors who are listening to this, include solar in their portfolios as a theme, knowing what we know now about the impacts of the global value chain of the Inflation Reduction Act, of all of these big picture ideas we've talked about. How can investors approach potentially adding solar into their strategy?

Rene Reyna

So I guess there's a lot of couple of ways, right? So hopefully you've heard over my comments. I talked about some of the value chain, if you will. So certainly there's ways to sort of handpick companies, if you're an integral stock buyer, to try and pick and choose those that you think could participate in this theme. I think there's some maybe more efficient ways. The ETF market allows you really to capture a theme. We here at Invesco actually have the industry's first and largest solar ETF. The ticker on that is $TAN. And really the approach of this fund, so it's a passive strategy, it's rules-based. We basically are tracking the max solar index. And what this index is comprised of is all the companies that sort of represent the solar value chain. And so what the methodology or the index does is it screens for companies that either will be considered a pure play, so two-thirds or more of their revenue is coming from the solar theme, and those would get sort of like a 1.0-factor weighting, if you will. And then companies that we consider medium plays. These are companies that have at least a third. And up to two-thirds of the revenue coming from the Solar theme. They'll get sort of a half of their weighting. And this then index sort of creates a list of companies. Currently, there are 44. It's a modified market cap. So it'll set limits on how much a company can represent in the portfolio. So the limit today is 10%. And then what happens is every quarter that those rules are reapplied and rebalanced on a quarterly basis. So you're ensuring you're maintaining ownership of these pure plays. I think an interesting thing as well as about this ETF, the solar landscape is global. So I mentioned China is a leader. We're seeing growth in Europe. And so you are going to have global representation in this US, which is important if you really want to capture the theme. So today, it's about 35% US exposure, 15% is coming from China, 12% is real. Then you have some smaller ones. You have some Germany holdings, Hong Kong. So it really gives you sort of that broad exposure to the theme. And it's just a convenient way in one ticker to get exposure. The fund is currently about two billion in size. So I mentioned it's one of the largest and it's got a cool ticker too, I mean, T-A-N, tan, easy to remember, think of the sun. And so it's been an easy way for investors to get pure-play exposure to this theme.

Kinsey Grant: Yeah, certainly tan during the summertime. How could you forget it? So simple. All right, so Renee, this has been such a wonderful conversation. I really appreciate all of your incredible context and analysis, and insight. Feel like I've really learned a ton about this space right now. That has certainly gotten a lot of interest over the last several months and years. So thank you so much for coming on the public podcast and for sharing all of this with us.

Rene Reyna: Exactly. Absolutely great to be here, and again appreciate the opportunity to be on your podcast Kinsey.

Kinsey Grant: Thank you so much. And with that, I want to thank one more time our guest, Renee Reyna, head of thematic ETF product strategy at Invesco, for his time today. And thank you to our partners at SinglePoint for making this episode possible. We will be back soon with even more updates from the renewables economy and beyond. Thanks again for listening. I'm Kinsey Grant, and have a great day.

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