The rapid rebound in clean energy shows signs of weakness. Indeed, investor enthusiasm apparently overestimated growth potential and overlooked challenges such as fierce competition and pressure on margins. We adjust our view to cautious, as today’s elevated valuations increase the risks of a reality check and further setbacks. However, selected opportunities are still on offer, primarily for those companies that have an “edge” to safeguard their profits, said Norbert Rücker, Julius Baer’s director of economics and research for Next Generation.
Rebound In Clean Energy
The clean energy issue saw a dramatic rebound through January, followed more recently by consolidation. Benchmarks, such as the S&P Global Clean Energy Index, are down more than 15% from their highs. Investor enthusiasm apparently outpaced fundamentals. The clean energy business is highly competitive and the challenges companies face in achieving sustainable profits should not be underestimated.
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The transition to renewable energy, that is, to wind and solar energy, was already in full swing before 2020. Capital is not a constraint on the transition, but rather on lengthy permitting processes that reflect the so-called "no" issues. in my backyard "(NIMBY). Therefore, the green stimulus has its limits. Substantial capital inflows, in part augmented by the large amount of funds that oil companies command, inflate the prices paid for projects and put pressure on rates of return. Of course, some companies have advantages in terms of knowledge and scale, but on average, the clean energy business faces pressure on its margins.
Pressure On Energy Prices
The latest UK offshore wind auction attracted attention in this regard. Strong growth in clean power generation puts pressure on energy prices in the longer term and shortens the duration of new power purchase agreements. The exposure of energy producers to price volatility increases, undermining the inherent stability of the business model. Some of the recent earnings posts point to this problem.
We see risks that the clean energy issue is about to face a reality check. We adjust our position to cautious as today's elevated valuations increase vulnerability to a setback. However, some opportunities are still on offer.
Norbert Rücker, Next Generation Director of Economics and Research, Julius Baer