With a recent market crash and unemployment spike, the financial world has been consumed by the global pandemic—and energy markets have been no exception. Demand for crude oil has dropped to scary levels, causing some of the largest players to struggle to stay afloat. And as it relates to consumers, solar installations have fallen, calling into question how high a priority renewable energy really is for them.
To get a closer look at how COVID-19 is impacting energy markets (both public and private), we spoke with Jigar Shah, Co-Founder of Generate Capital, which recently raised over $1 billion to back entrepreneurs tackling a variety of sustainability challenges. (Previously, Generate invested out of a $200 million fund.)
During our conversation, we discuss four main themes:
- COVID-19 has hit the energy sector, but the impact isn’t homogenous; clean energy is being impacted in somewhat unique ways.
- COVID-19 is impacting investors, but investors in clean energy have seen their investment strategy be “durable and uncorrelated to the broader stock market.”
- COVID-19 has hit industries surrounding sustainability, but their outlooks aren’t completely grim.
- Some parts of the energy sector are still going to be necessities during these market shifts.
Our conversation has been edited for length and clarity.
SONIA JOHN: In February, your team at Generate Capital raised $1 billion to invest in clean energy companies. Did you find this process more difficult with LPs during a time like this?
JIGAR SHAH: Generate is a C Corporation so our investors invested in our shares and a piece of all the assets we already had on the balance sheet. In general, we have proven that we can buy assets featuring proven technologies that are misunderstood by the market. This strategy is durable and uncorrelated to the broader stock market, as we have seen in this downturn.
JOHN: It seems that timelines are slowing down. My guess is the market is more concerned about dealing with COVID-19 than living green lifestyles at the moment. So as far as deploying that capital in private markets, how has GC’s investment strategy changed?
SHAH: Like many of our peers, we are trying to figure out how this crisis is different than ones in the past. Still, there is a need to replace broken or non-functioning infrastructure. With our help, we can replace old technology with better, more resource efficient technology. The customers we serve save money – even with the depressed commodity prices today. More importantly, perfectly good projects are having trouble raising money because some of our peers have pulled back substantially.
JOHN: I assume some opportunities in sustainability have become less investable during this time (for instance, solar installations have slowed), while others are still very much on the way up. Can you talk about which parts of your investment thesis fall into each category?
SHAH: Solar installations are not less popular—just more difficult to install on time with work stoppage rules and less utility personnel available for interconnection approvals. The same is true for energy efficiency, microgrids, organic waste, electric transportation, and other themes. In general, the biggest drop is in the aviation and liquid fuels segments which will most certainly have a long-term slowdown.
JOHN: In public markets, who would you say are the two biggest winners and losers this first quarter of 2020? What do those companies’ performance signal about consumer behavior, if anything?
SHAH: We think long-term, so we rarely find trends in just two quarters; but our sense is that consumers have lost confidence for the time being. They are more cautious spending money until they can clearly see how we exit this current crisis. Importantly, people are still using electricity, needing water, disposing of waste, and consuming other utilities. These sectors will proven to be durable during a long term crisis.
JOHN: It looks like, YTD, the S&P 500 ESG Index outperformed the S&P 500 Index, albeit slightly. Why do you think this was the case?
SHAH: Short term fluctuations are hard to explain. But over the long-term, companies that care about their environmental footprint, all of their stakeholders, and those that subject themselves to rigorous governance, perform better than those that do not.
JOHN: Specifically relating to renewables, are certain parts of the market getting hit harder than others? Why so?
SHAH: Renewable energy is really about the infrastructure. The manufacturers, construction companies, and other parts of the supply chain have ups and downs, but the project provides stable dependable cash flows year after year.
JOHN: What countries do you forecast will be most impacted by the reduction of renewable projects?
SHAH: In general, renewable energy projects aren’t declining. They are just getting pushed out as timelines lengthen from shelter-in-place rules and important health and safety measures that make construction less essential. Luckily, these projects won’t be lost. There will be larger deployment as governments turn to the renewable energy industry to provide the much needed stimulus to the global economy. However, there is some risk that oil producing countries slow their diversification in response to low oil prices.
JOHN: The EPA made a recent decision to not “seek penalties for noncompliance with routine monitoring and reporting obligations.” How do you feel about this? Is a policy like this necessary during times of crisis? If not, what’s the way around it?
SHAH: In general, EPA regulation is important and many citizens all around the world are realizing that clean air really does reduce adverse health impacts. That being said, the EPA is not the only group that can bring penalties to corporations. Many corporations who abuse this rule will find themselves losing their social license to operate as we return back to normal operations.
JOHN: When we last spoke with you, we discussed about what politicians and those with influence should do to combat climate change. During COVID-19, we’re focused on getting a lot of materials together and that could yield a lot of waste. But the conundrum is we can’t just stop mass manufacturing and tossing masks right now, for instance. Is there a middle ground that politicians can adopt?
SHAH: All of this waste can be recycled or repurposed back into productive use. It certainly will cost something and requires regulation. However, as we experience this crisis, people are recognizing the need to spend additional money and pass local regulations on waste disposal. These actions could employ more people and create a more sustainable alternative to burying our garbage.
JOHN: Emissions have temporarily reduced due to worldwide lockdowns. However, there are predictions of emissions rebounding and even increasing after COVID-19 plateaus and we approach “business as usual.” What do you think we can do to tackle that problem? In addition, how do we make sure we’re not in a worse climate position after the crisis?
SHAH: After 9/11 it took over 2 years to get back to “business as usual” in the airline business. I suspect that the 1 billion people around the world that create most of the pollution will take a long time to get back to normal. In the meantime, people are learning to appreciate all of the fresh air and beautiful vistas. It is entirely likely that implementing clean solutions that save money will accelerate very quickly as governments need to stimulate their economies and meet their climate reduction targets.
Sonia John is a Writer at The Rising mainly covering the intersection of businesses and sustainability. You can pitch her stories at firstname.lastname@example.org.