Fund Insight ODDO BHF AM Active Small Cap
Story of the month
The Inflation Reduction Act (IRA) is an American law enacted in August 2022, aimed at fighting inflation by investing in domestic energy production while promoting clean energy. Indeed, after having been criticized for a long time for their inaction, the United States aims to take the lead in the fight against global warming, by reducing their carbon emissions by 40% by 2030 compared to 2005 levels. The program includes nearly $400 billion in tax incentives for green energy production, particularly targeting electric vehicles, solar panels and storage. However, such incentives risk undermining the European competitiveness of green technologies, prompting an immediate response fromthe European Commission that could be described as a European IRA.
The scope and speed of the IRA in the United States is rightly perceived as a protectionist measure on the part of the USA by Europe. Faced with such initiatives we expect a comparable reaction from the European authorities so that the zone remains competitive and maintains its relative lead. We expect about 50 billion euros of subsidies per year to advance Green Tech in Europe.
A FRAGMENTED EUROPEAN RESPONSE
The European response to the IRA is divided into four areas:
- The "Net-Zero Industry Act", which aims to ensure that Europe covers 40% of its clean technology needs locally (solar panels, electrolysers, wind turbines, etc.). This plan, currently being examined by Parliament, would simplify and accelerate the process of obtaining "green" industrial permits (solar, wind, geothermal, biogas, storage, etc.). It also aims to facilitate their financing, and formalizes the consideration of environmental criteria in public tenders.
- The Critical Raw Materials Act aims to secure supplies of critical raw materials (nickel, cobalt, copper, etc.). The aim is to free ourselves from any dependence on raw materials, with a 2030 target of 10% local extraction, 40% local production, and a maximum dependence of 65% on imports from a single third country. This last threshold is significant, given that Europe is currently 97% dependent on China for its magnesium needs.
- The "Electricity Market Design" plan, which aims to reform the design of the EU's electricity market, to motivate the use of renewable energies and the phasing out of gas. In particular, it encourages longterm contracts to guarantee price stability.
- The creation of a "European Hydrogen Bank": an actor to connect producers and customers of "green" hydrogen. Its principle consists in auctioning hydrogen, guaranteeing to cover the difference between the purchase price and the production cost. The plan proposes a target of 10 million tons of renewable hydrogen per year in the EU by 2030.
A CLEAR GROWTH DRIVER FOR EUROPEAN RENEWABLE ENERGY PRODUCTION:
The renewable energy sector is logically a direct beneficiary of these future European directives. This trend is likely to increase several times over as EU member states roll out their own local support. Some of the smaller companies in our investment universe find themselves at the heart of this growing market, with European construction targets indicating respective CAGRs of 14% and 12% for local solar and wind generation through 2030. We have a strong interest in companies like Meyer Burger and SMA Solar, which should take full advantage of their status as Europe's only producer of solar panels and components.
ELECTRIC VEHICLES: AN EXAMPLE OF EUROPEAN INITIATIVE.
The EU's battery targets are more modest than expected and subsidies remain unclear compared to those in the United States. However, we believe that state-level support is very likely, at least for battery investments, which will help domestic OEMs compete against imports from the U.S. and China. Ultimately, the lower costs will be reflected in EV prices, which will also put pressure on European producers but will allow for greater adoption of this softer mobility.
Other indirect opportunities for various niche sectors
As mentioned earlier, another key focus of European measures is local sourcing, especially of battery mining resources. However, if extraction projects are facilitated, production times would be in the order of 20 years according to the regulations. Doubts therefore remain concerning European extraction (objective of 10% in 2030). Nevertheless, downstream processing industries are not subject to this constraint, which suggests good opportunities for companies like Imerys, which could become Europe's leading supplier of lithium (an element on which the electric vehicle industry inevitably depends).
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