Renewables: Opportunities thanks to lower prices

Investors’ interest has faded above all in areas where the earnings outlook has deteriorated drastically. Key reasons for this deterioration included a sharp rise in interest rates, which has resulted in much more expensive financing for the often cost-intensive projects. On the other hand, the abrupt rises in prices for commodities and materials, as well as higher labour costs, have rendered the original price and profit plans of many projects in renewables that have already been launched or planned completely irrelevant. Following a period of very low interest rates and inflation, some developers were caught off guard by these changes.

Additionally, for companies that are not expecting to turn a profit for the foreseeable future, higher interest rates on the capital market tend to result in lower valuations for their equities. In particular, this impacted firms in the hydrogen economy, where profits are generally only anticipated in the distant future. The fund management of Raiffeisen-MegaTrends-ESG-Aktien does not currently have much investment in hydrogen equities in the fund.

For those already invested, the steep declines in many share prices in the field of renewables is naturally a negative development. At the same time, these price declines offer better levels to enter this segment and better earnings opportunities for those who do enter or boost their investment now.

Growth perspectives for renewable energy, despite the challenges

Markets for wind and solar power will continue to grow in 2024. Demand for renewable energy is being driven by the rising tide of the energy transition and the generally falling costs for wind and solar generation equipment.

• It is projected that global installed capacity in wind power will rise by about 10% in 2024.

• At the same time, installed solar capacity is forecast to expand by around 20%.

Moreover, the interest rate cuts expected for this year and 2025 may have an additional positive impact on renewables equities, as they generate the opposite effects compared to 2022 and 2023. In terms of interest rates at least, there shouldn’t be any headwinds anymore.

Opportunities and risks

Any time one see investment opportunities though, there are also risks involved. Technological innovation can result in breakneck changes in the market position of individual companies, for better or for worse. Bottlenecks and supply chain problems with raw materials and components, unexpected cost overruns and regulatory intervention all represent latent risks or uncertainty factors. Consequently, careful market monitoring is necessary, in order to be able to adjust investments in due time if needed. Ultimately, the last two years have shown that even clear growth sectors like renewables are not immune to intense price swings and declines. Despite this, however, the positive, long-term outlook remains intact.

Why renewables are so important

Renewables are the key to the energy mix of the future in the gradual transition away from fossil fuels. Steadily increasing demand means that wind and solar power have advanced to become the driving forces in the megatrend towards renewable energy. Wind farms and solar cells already form the basis for the clean, low-carbon energy of the future:

• Wind power
  Wind power continues to be an essential source of renewable energy, now accounting for almost 10% of global electricity generation. Significant growth has been seen in the market for wind power equipment in recent years, with around 100 gigawatts of new capacity installed at the global level in 2023. At present, China, the European Union, and the United States are the three leading players on the global wind energy market.

• Solar power
  Along with wind power, solar power is also a crucial part of this sector, accounting for around 5% of global electricity production in 2023. Remarkable growth has been registered in the market for solar power generation equipment, and around 400 gigawatts of new solar capacity was installed globally during that year. China, the United States, and India are the dominant players on the global solar markets.

Upswing thanks to legislation such as the Inflation Reduction Act and the Green Deal

In August 2022, US President Joe Biden signed a new piece of legislation, the Inflation Reduction Act. Among other things, the Act seeks to cut the costs of prescription medication, reduce health care bills, and bring down energy supply prices for those in the USA. Some USD 430 billion are to be spent within the scope of this act over the next ten years. The legislation also aims to fight inflation and reduce the chronically high US budget deficit. The package of measures is intended to accelerate climate transformation in the US economy, for instance by providing tax relief for electric vehicles, while at the same time promoting investments in wind energy and solar power.

The darker side of this ambitious goal: A new wave of protectionism threatens to take hold under the guise of fighting inflation. For purchasing an electric car, for example, there are tax credits of USD 7,500 – but only if the vehicle was manufactured entirely in the USA. This could lead to many European firms moving to the USA or at least shifting considerable production capacities from Europe to the USA.

Europe, however, is not sitting idly by. Thanks to the Green Deal, its goal is to be the first completely climate-neutral continent by 2050, in addition to emitting 50% less CO2 by 2030. This also presents European solar power producers with great opportunities for good growth rates.

Renewable energy in
Raiffeisen-MegaTrends-ESG-Aktien

Raiffeisen-MegaTrends-ESG-Aktien is a global equity fund, which invests in the field of wind and solar power among other areas, for example in the following companies:

Vestas Wind is a market leader in the field of wind power. The company has already installed more than 173 GW of wind power assets, thus helping to prevent millions of tonnes of CO2 emissions annually. Vestas is also a leader in the development of new technologies for wind energy, such as low-emissions offshore wind power assets.

Sunrun is the largest supplier of solar power systems for households in the United States. In recent years, the company has significantly strengthened its market position and is now active in 48 of the 50 US states. Sunrun has installed more than 900,000 solar systems, helping to provide more than 1.4 million households with renewable energy.

The funds Raiffeisen-MegaTrends-ESG-Aktien and Raiffeisen-SmartEnergy-ESG-Aktien exhibit elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time and it is not possible to rule out loss of capital.

Sources:
Energy Transition Investment Trends 2024 - BloombergNEF (Bloomberg Finance L.P.)
10 Things to Watch in 2024 - BloombergNEF (Bloomberg Finance L.P.)
Global PV Market Outlook, 4Q 2023 - BloombergNEF (Bloomberg Finance L.P.)