INSIGHT: Renewables bounce back
The stock market is one of the best indicators of underlying market direction and corporate profitability. Investors spend a lot of time and money trying to forecast what will happen. Individuals may get it wrong, but the collective view of the market rarely does.
In the past five years, the market has spoken powerfully about its expectations for green energy, resulting in a miserable period for owners of renewables stocks. Share prices of the key manufacturers of wind and solar equipment dropped by nearly 90% from their peak in the third quarter of 2008 to the trough four years later.
Utilities have seen their share prices drop by about 75% over the same period. A perfect storm of weakened volumes, overexpansion and pricing pressure against a backdrop of economic, financial and regulatory uncertainty dragged down corporate earnings and outlooks, along with share prices. This precipitated a necessary period of introspection and restructuring, with a refocus on new growth markets.
However, a new era seems to be upon us. Share prices have been recovering steadily since the middle of 2012 and accelerated through the back half of last year. Wind industry bellwethers Vestas and Gamesa have seen their share prices more than quadruple in the past year, capped off by Vestas’ successful capital increase last month, which was rapidly taken up by the market.
It is a sign of stock market optimism that share prices are not only recovering but that the sector is able to raise fresh capital again. This has been helped by renewed optimism about the outlook for volumes — and, more importantly, improving profitability.
Market sentiment has clearly turned strongly and things are looking positive again. Wind and solar installations are expected to grow by nearly 45% and 30% this year respectively. Regulatory uncertainty seems to have abated and we can expect one last production tax credit extension in the US, as well as a 2030 EU renewables target (even if it’s not as strong as initially hoped). New financing models, in addition to the increasing appetite from institutional investors to make direct investments in renewables infrastructure, will accelerate the important process of capital recycling for asset owners, freeing up new capital for growth.
However, things have to be different this time for growth to be both profitable and sustainable. Managements and shareholders need to be disciplined and pick their focus areas with care. Previous growth markets have reached maturity, and while emergent markets such as Brazil and South Africa show great promise, it remains to be seen if the expected 40GW of wind opportunities in developing countries can be profitably exploited. Tenders and local-content requirements are potential banana skins for economic investment and profitable growth in these areas.
The EU offshore market looks set to grow at 15-20% a year to 2020, but recent announcements by the British government suggest that up to 6GW of projects in the national pipeline may not proceed.
Difficult decisions lie ahead for the remaining unaligned offshore turbine manufacturers, with one further alliance (or market exits) in prospect.
Finally, utilities, which are the key drivers of renewables infrastructure investment, continue to see their balance sheets and business models under pressure, as traditional fossil- fuel assets have become underutilised because of the increasing amounts of renewable energy on the grid.
Our industry has shown itself to be remarkably resilient and creative, and after a last round of consolidation and cost-cutting in 2014, there are many reasons for us to be optimistic. A leaner, tighter sector can again look forward to profitable growth of a much more sustainable variety.
Recharge Insight is a new premium subscription service aimed at providing renewables thought leaders and decision-makers with best-in-class analysis of key issues facing the industry. Insight will be launched at EWEA 2014 in Barcelona. For more information on Recharge Insight, contact Ksenia Burkova at firstname.lastname@example.org