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Daily Intelligence Briefing

Wednesday, May 22, 2024

Identifying Change-Driven Investment Themes

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

American Solar Installations Reach Key Milestone, Growth Trajectory Could be Disrupted by AI Demands

Summary: The number of solar panel installations in the US recently surpassed the 5 million threshold. Half of those installations were completed within the past four years, exhibiting how quickly solar capacity has scaled in just the past few years. Installations are expected to double by the end of the decade, but that pace could potentially be boosted significantly by the emergence of generative AI applications and the expanding footprint of data centers powering them.


Solar power backed the vast majority of new US energy capacity added last quarter, suggesting that an increased pace of grid expansion will also facilitate an uptick in solar installations. More of the panels installed on American soil are coming from domestic firms than in years past, which has recently boosted a US-based panel manufacturer to the the top spot among its global peers for the first time in six years.


Related ETFs and Stocks: Invesco Solar ETF (TAN), iShares Global Clean Energy ETF (ICLN), First Solar, Inc. (FSLR)

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Per data collected by the Solar Energy Industries Association (SEIA) and Wood Mackenzie, it took the US four decades – spanning the period from 1973 to 2016 – to reach one million solar panel installations nationwide. However, quintupling that figure and reaching the 5 million threshold took just eight years, exhibiting the exponential growth of American renewable power capacity. This means that over half of all operating solar installations in the US were added in the period since 2020.


Doubling the current level of installations by adding the next five million panels is expected to be completed by the end of this decade. However, it is possible that pace could be supercharged by a sudden uptick in AI adoption and the power required to scale machine learning applications. In a recent Intelligence Briefing, MRP recently noted that the quickening adoption of generative AI has flipped the script for American power providers who had dealt with a decade-and-a-half of slowing growth in electricity consumption until very recently. Other emerging sources of increasingly hungry US power demand, however, will come from the automotive, manufacturing, and digital asset sectors.


Since 2004, industrial use of electricity has not exceeded an estimate of roughly 1.0 trillion kilowatt hours. Similarly, commercial electricity usage has been rangebound between 1.3 and 1.4 trillion kilowatt hours. Per the International Energy Agency (IEA), the US’s 2,700 data centers consumed more than 4% of the country’s total electricity in 2022, but that figure is projected to grow to 6% over the next two years. As data centers increase their share of electricity consumption, they will also expand US electricity use in general. Recent trends however, are expected to disrupt this pattern of relative stagnation. Per Grid Strategies, reports filed in 2023 with the Federal Energy Regulatory Commission (FERC) show grid planners expect nationwide electricity demand to grow by 4.7% over the next five years. That doesn’t sound like much, but it is an upward shift of more than 80% from 2022 estimates – enough to make Grid Strategies conclude that the electric grid “is not prepared for significant load growth.”


Per Newmark, hyperscalers like Amazon and Microsoft – owners of larger data centers that operate facilities directly under their own management – currently need anywhere from 10-14 kilowatts (kW) to power each rack currently in data centers, but this is likely to rise to 40-60kW for AI-ready racks equipped with the resource-hungry GPUs so critical to generative AI processes. This means that overall consumption of data centers across the US is likely to reach 35 gigawatts (GW) by 2030, up from 17GW in 2022.


Within their projections for AI’s impact on energy consumption, Goldman Sachs has forecast the US’s total power needs to grow by more than a fifth, expanding from 470GW in 2023 to 567GW in 2030. That gain is partly driven by a tripling of data center power demand from 15GW to 45GW over the same period. The capacity of all US utility-scale solar farms deployed last year was equivalent to about 15GW as well. This level of deployment will play a large role in balancing the energy needs of data centers with supply from increasingly popular renewable sources. FERC data reviewed by SUN DAY Campaign reveals that solar provided 86.8% of all new capacity in the first quarter of 2024.


American solar and photovoltaic manufacturers would benefit strongly from increasing utilization of solar power and a more rapid deployment of capacity. Earlier this month, First Solar became the world’s most valuable solar manufacturer, putting a US firm at the top of that list for the first time since 2018. Chinese companies had dominated the solar landscape until recently, following a trade crackdown by the White House over the past several years. The latest change in US policy, announced just last week, is a doubling of tariffs on solar cells, which will jump to 50% from 25% this year. Increased tariffs have helped many American panel consumers rely on domestic producers, slamming the valuations of their Chinese counterparts that are now languishing under a glut of supply.


Though Bloomberg notes that First Solar’s annual output capacity is still trailing foreign compeitors like Shanghai-based Jinko Solar, which produced 6.5x as many GW of panels last year, the former now carries a record backlog of 80.1GW that stretches into the end of the decade. First Solar last year announced plans to spend up to $1.1 billion on what will be a fifth US factory, set to open in 2026, and in January acquired another facility in Ohio that previously produced Peloton exercise bikes, but will now serve as a distribution center for its main manufacturing efforts. Investors can gain exposure to the solar industry via the Invesco Solar ETF (TAN). First Solar is the largest holding in this fund, responsible for a weighting of 13.9% in TAN.


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