Renewables Will Weather The Pandemic

The COVID-19 pandemic has brought life to a screeching halt and plunged the world economy into a deep recession. While global lockdowns have dealt a major blow to many industries (aviation, travel, manufacturing, etc.), one that appears poised to emerge from the rubble is renewable energy. As heavily polluted cities experienced dramatic improvements in air quality and carbon emissions are on track to fall by 4 to 7 percent relative to 2019, governments, companies, and investors alike have taken interest in the role of renewable energy in a post-pandemic world.

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Q2 2020 hedge fund letters, conferences and more

Renewable Energy Industry Is Insulated From The Covid-19 Shock

The renewable energy industry is not completely insulated from the COVID-19 shock. As of May 2020, clean energy employment had fallen by 17 percent. According to the International Energy Agency’s (IEA) Renewable Market Update, renewable capacity additions this year are projected to be 13 percent lower than last year.

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Yet, global renewable power capacity is expected to grow by 6 percent, accounting for an increasing share of power generation due to the fall in global energy demand. Even in the face of COVID-19, the United States solar energy market is projected to grow at a compounded annual growth rate (CAGR) of 17.3 percent over the next five years. Experts expect the (potential) expiration of tax credits in 2021 will push investors in solar to finish their projects in 2020 and 2021. Additionally, the 30 percent tariff on solar panel imports will make U.S. producers more competitive and self-sufficient. Together, they have the effect of dampening the impact of COVID-19 on the industry.

Renewables' moment in the spotlight has long been coming, thanks to a combination of declining prices and rising interest from both the public and private sector. From 2010 to 2018, the global weighted-average levelized costs of electricity (LCOE), the lifetime costs over electrical energy produced, of utility-scale solar panels, onshore wind, and battery storage respectively fell by 77%, 35%, and 85%.

Governments around the world, recognizing the urgency of the climate crisis and recent volatility of oil prices, have used the pandemic to speed up their energy transitions. In July, Korean President Moon Jae-in launched the Korean New Deal, a $135 billion investment in green and digital technology. Included in a fiscal stimulus package aimed at rebooting the German economy is a $10.6 billion National Hydrogen Strategy, although it should be noted for hydrogen to be truly carbon-free it must be accompanied by a ramp up of renewable energy generation. Even oil-dependent Nigeria is ending fossil fuel subsidies as part of its stimulus plans and committing to creating and maintaining 5 million new solar connections. Such favorable regulatory environments may present opportunities for investment in the growing industry.

A Return On Investment

Over the years, renewable energy has proven itself a return on investment. A joint report by the IEA and the Imperial College Business School found renewable investments in Germany and France yielded returns of 178% over the past five years versus -21% for fossil fuel investments. In the U.S., those figures were 200% for renewables and 97% for fossil fuels. The report also found that green energy stocks were overall less volatile than fossil fuels. In addition, renewable power companies typically trade at high price-to-earnings ratios, signalling high investor confidence in future returns.

Although the market capitalization of hydrocarbons still dwarfs that of renewable energy, giants are emerging within the sector. Denmark’s Orsted, one of the world’s largest offshore wind developers, has seen its shares soar 135 percent and its market value rise to $60 billion over the past two years. Spanish utility company Iberdrola, which has 33 GW of installed renewable power and is adding more, has seen its shares jump 78% over that same period and its market capitalization rise to $80 billion.

In contrast, oil and gas giant British Petroleum’s (BP) shares have halved over the past two years and its market value has fallen to $70 bn. Perhaps that, along with regulatory pressure, is why BP is seeking to expand its renewable energy portfolio, but BP is hardly alone in such endeavors.

Last week, Apple Inc. announced it would invest in the construction of two of the world’s largest onshore wind turbines, located just outside the Danish town of Esbjerg, as part of its commitment to reach carbon neutrality by 2030. This move is wise on Apple’s part as investors are increasingly placing emphasis on companies with high Environmental, Social, Governance (ESG) ratings.

A Focus On ESG

Earlier this month, Morningstar reported that assets under management in funds that abide by ESG principles surpassed $1 trillion for the first time on record. Morningstar attributed this trend to the disruption caused by the COVID-19 pandemic, which “highlighted the importance of building sustainable and resilient business models based on multi-stakeholder considerations.” Such sentiments were echoed by Larry Fink, CEO of BlackRock, the world’s largest money manager. In an interview with CNBC on July 17, Fink noted that BlackRock had seen a “surge of interest” among clients interested in investing in areas such as renewable energy.

For investors interested in testing the waters, the following ETFs, based on 1-year trailing returns, may be good starting points: First Trust NASDAQ Clean Edge Green Energy Index (QCLN), Invesco WilderHill Clean Energy ETF (PBW), Invesco Solar ETF (TAN). One of the top holdings for these funds was Tesla Inc. While better known as an electric vehicle (EV) manufacturer, Tesla acquired Solarcity for $2.6 billion in 2016, thus becoming a player in the renewables arena. In the second quarter of 2020, Tesla touted a reported $227 million in net profit, surprising Wall Street analysts who had predicted a $250 million loss. Despite the drop in its share price over the past month, Tesla has undoubtedly emerged as a winner of the pandemic.

The COVID-19 pandemic has drastically disrupted daily life and economic activity. It has sparked a discussion over what industries will survive the creative destruction onset by the pandemic and what role renewables will play in a post-pandemic world. Despite short-term losses, renewable energy, with a track record of providing returns on investments and increasing interest from ESG-minded investors, will weather the COVID-19 storm.


About the Author

Natalie Wu is pursuing a Masters in International Economics and Finance at the Johns Hopkins School of Advanced International Studies. She can be reached at nwu11@jhu.edu.