Go Green! That’s what they say. Since 6th grade we have been taught that the formation of fossil fuels such as coal takes a long time and that the supply for the same is limited and going green is the solution.
Yes, it is a way out but not the end of all problems because economics associated with going green can be complicated.
Today, we are going to discuss the very same economics-ka-twist in green energy and that is Greenflation. So, what is this Greenflation and how will it impact Green Energy stocks? Let’s find out.
The popular phenomenon of Go Green has come with its repercussions and that is Greenflation.
To understand Greenflation, let’s understand inflation first. Inflation is the rate at which the prices of goods increase. Just the same way ‘Green’flation is the rate at which the prices of goods in the green energy sector increase. It is nothing but the rise in prices of materials, minerals, etc. that are used in the creation of renewable technologies.
You have seen how the usage of batteries has increased, right? Especially in cars, bikes and scooters. The batteries used in them are mostly made of Lithium. Since the demand for batteries has increased, the prices of Lithium have multiplied (coz obviously the supply of Lithium is limited.) As you can see here 👇
Source: tradingeconomics.com & Linkedin
As the price of lithium is increasing the same way the price of other commodities that are used in renewable energy is increasing such as the prices of tin, aluminium, copper, nickel cobalt gave a rise of 20-90% last year. That’s exactly what Greenflation is all about. Let’s take a deeper look at Greenflation and the Energy Sector.
Greenflation & Renewable energy
According to a report, the global renewable energy market was valued at $881 Billion in 2020 and it is expected to reach $2 trillion by 2030.
The rising cost of energy is expected to hinder the setting up of new green power projects. It is also believed that rising cost and supply chain problems won't be a long term problem. And the situation of scarcity is expected to get better with economies of scale and proper allocation of funds.
Still, greenflation is impacting the companies based on it and moving forward we will see the impact of greenflation on green energy stocks.
Impact of Greenflation on Green Energy Stocks
Have you read our blog on green energy stocks? If you did,then you might have found certain stocks in it that are associated with green energy. Now, we will be discussing how greenflation can impact your green energy stocks.
Impact on revenue margins:
The rising prices of raw materials can increase the cost of production and if the cost of production is increased and the price of finished goods are not then it can impact the revenue margins of the company.
For example, Amara Raja Batteries manufactures automotive batteries and the key ingredient to manufacture them is lithium, nickel and cobalt and as we saw the price of them had increased by 20-90% making the cost of production higher and with this, if the company do not raise the prices of its batteries, the revenue margins are expected to be affected.
Since the demand for raw materials for manufacturing renewable products is increasing and the supply chain is already disrupted, the government might intervene and put a cap on buying quantity.
Barrier to entry:
Greenflation clubbed with government intervention can result in barriers to entry in green energy and renewable space. Existing energy stocks such as Adani Renewables, Borosil Renewables, KP energy and more are expected to be in the sector with strict barriers to entry.
Bottleneck of industry:
Overdependence on a few selected raw materials is expected to create a bottleneck in the industry. For example, Borosil Renewable is the only company that produces solar glass in India. And the chief raw material for that is Glass. Duh! That makes Borosil Renewables excessively dependent on the availability of glass which creates a bottleneck for the company.
So, do you think going green will solve all our environmental issues or does it come with its own set of issues?
The presence of Greenflation is also debatable and it's said that it is not everywhere and that the rise in price is caused due to constraints over oil prices and have little to do with climate policies.
A recent report on Greenwire said:
“Coal is more expensive because fewer miners are not producing enough to meet demand, while steel is pricier partially because some steelmakers, cautious of expanding production and their carbon footprints, have declined to restart idled blast furnaces. Metals like copper and nickel only recently died down from record-high bull runs driven by scarce supplies unable to meet the demands of a growing clean energy sector.”
This statement just showcases the debate going on over the reasons for high prices but it is evident that the prices of green commodities are high.
That was all about Greenflation.
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