Tenth Annual Sustainability & Energy Transition Primer

Overview:

• Power demand is returning to the U.S. as electrification drives all sectors, especially artificial intelligence (AI) and manufacturing.
• We expect a sustained cycle of grid investment despite macro uncertainties.
• Renewables are the lowest cost generation in most markets, and utilities are embracing a digitalized, distributed, low carbon grid model.
• Uncertainty around IRA could delay renewables adoption.
• Despite near-term headwinds, the energy transition remains structurally sound. We see a compelling multi-decade opportunity for investors focused on scalable energy platforms.

The TD Cowen Insight

We have created our 10th annual comprehensive primer on the Sustainability & Energy Transition sector to assist investors in navigating its complex and varied sub-verticals. Given improved unsubsidized economics, we remain bullish on long-term prospects but see policy uncertainty and oversupply continuing to dampen near term investor sentiment.

Our Thesis

We have compiled a 400+ page primer on the sector. Political backlash toward the green economy, coupled with oversupply in some markets (such as solar), is likely to continue dampening investor enthusiasm for the broader industry for the time being. However, we see the group well-positioned for long-term investors.

Unsubsidized levelized cost of energy (LCOE) of renewable power choices (solar and onshore wind) remain compelling relative to the marginal cost solution - combined cycle gas turbines (CCGT). We expect the LCOE of renewables and CCGT to diverge as renewables benefit from declining hardware costs and technological advancements. At the same time, CCGT faces a supply squeeze; an explosion in power demand over the past year has led to a tripling of natural gas equipment costs that now have lead times out to 2029 and beyond.

We note that not only are renewables the lowest-cost source of power generation, but they are also the fastest to build. The traditional utility model was not designed for such a load growth scenario, and we see an “all of the above” approach needed combining natural gas with solar, wind and storage solutions.

What is Proprietary?

Six TD Cowen senior analyst teams spanning various industries plus our Washington Research Group (WRG) Energy Transition & Sustainability analyst collaborated to form a comprehensive view of the sustainability and energy transition ecosystem, current key themes impacting stock performance and potential investment considerations for stakeholders. Within this report, we provide a thorough analysis of potential Inflation Reduction Act (IRA) revisions, a deep dive into utility load growth, the need for a modernized electric grid and tariff-induced manufacturing growth.

Financial and Industry Model Implications

Our forecasts consider the increasing need to leverage technology – both networking and software – that manages distributed energy resources (DERs) and the key pillars of grid modernization needed to better manage the US$3 trillion global electricity market. Within the report, we outline key drivers and forecasts by industry to form our overall sector view.

What to Watch

Looking ahead, we see seven mega energy transition themes playing out:

• data center load growth leading to challenges and difficult decisions,
• the case for renewables; fastest to deploy and lower cost than gas,
• electric grid needs to be modernized to handle the electrification of everything,
• flexible data center loads may be able to plug into the grid faster,
• challenges with integrating renewable energy sources into the grid stunting near-term growth,
• trends in 2026 and beyond should be a tailwind if rates reverse course and
• DERs and virtual power pants (VPPs) – opportunity for low-cost capacity additions.