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Why the ‘unexpected rally in renewables’ could last. Plus, big bank savings account ETFs lose their appeal

The beleaguered clean energy sector is finally showing signs of life, as Citi analyst Vikram Bagri discusses in the new research report, Unexpected Rally in Renewables. Mr. Bagri sees four reasons the rally may continue: short covering, data centre demand, solar power development and new Chinese regulation.

Using the BMO Clean Energy ETF (ZCLN-T) as a proxy, the performance of the sector has been abysmal in recent years. The ETF fell 37 per cent between mid-January 2023 and the end of April this year. In the brief period since that time, however, the fund has jumped 13.5 per cent.

Mr. Bagri believes short covering is a major catalyst for the recent rally. The sector had been widely shorted as progress towards decarbonization was slower than many hoped. Research reports highlighting the massive electric energy requirements for artificial intelligence (AI) expansion, and AI providers’ commitment to meet this demand with renewable power, resulted in a rush to cover related shorts. It is possible that the speculative funds that shorted the stocks may now switch to long positions, according to the analyst.

The AI expansion is one reason Citi expects further strength in renewable power stocks. Microsoft CEO Satya Nadella announced last week that 100 per cent of the company’s AI-related data centre power needs will be met with renewable power by 2025. Microsoft will be among the five biggest players in the AI revolution.

U.S. Independent System Operators (ISOs), regional organizations that co-ordinate power transmission, estimate a large increase in planned solar power generation. Mr. Bagri reports that the U.S. solar pipeline has increased by one terawatt to 2.3 terawatts, “Hence, it appears, solar will play a key role in datacenter buildout in the U.S. and investors are looking to gain exposure to the theme through renewable stocks.”

The Chinese solar power industry is discussing reforms to manage aggregate capacity and establish intellectual property protections. These measures will help prevent global overcapacity and protect pricing power for Western solar power equipment providers, another boost to developed world renewable power stocks.

U.S. natural gas prices are also supporting renewable power demand after a recent 40 per cent rally. American households using natural gas are now more incentivized to switch to renewables.

-- Scott Barlow, Globe and Mail market strategist