The year 2023 was not kind to renewable energy businesses. Green stars such as Danish offshore windmill developer Orsted have plummeted after years of strong valuations and lower power costs. Cautious investors should see a recovery despite the threat of Donald Trump's potential reelection as US president.
On the surface, the clean energy industry seems like one to swerve. Shares of Siemens Energy, a manufacturer of wind turbines, and Orsted fell more than 50% from June to the end of November as a result of power prices failing to keep up with rising input costs. This led to billion-dollar write-downs and state assistance. The iShares Clean Energy ETF had dropped nearly 30% and the MAC Global Index of solar companies had dropped almost 40% as of the end of November 2023, even though benchmark European and US indexes rose. From over $180 billion in 2021 to $14 billion in the third quarter of 2023, quarterly inflow into worldwide sustainable funds decreased, with actual outflow of US funds.
In 2024, another risk is that Trump may eliminate the $369 billion in clean energy funding provided by the US Inflation Reduction Act. However, the demand for green capital is expected to rise over time. The International Energy Agency projects that investments in clean energy will surpass $1.7 trillion in 2023, while fossil fuels will only account for $1 trillion. By 2030, three times more solar and wind power will be produced in order to keep global warming to 1.5 degrees Celsius above pre-industrial levels. Analysts at Bernstein believe that the inflation of equipment costs may have reached its peak, and in an effort to improve project economics, the UK government has increased renewable subsidies along with Portugal and India.
Furthermore, the primary factor driving wind and solar valuations is the strong negative correlation that their extended duration has with interest rates. Consequently, investors in green stocks should be buying if they believe that borrowing costs have reached their peak. According to Capital Economics, stocks of renewable energy businesses could achieve a 50% return over the course of the same period if 10-year US Treasury yields drop to the analyst's projected level of 3.75% by the end of 2024.
Investors clearly need to do more than simply make sure their target is green. Rapid production of low-cost Chinese solar panels runs the risk of escalating a glut of supply, which would be disadvantageous to Western manufacturers such as Meyer Burger Technology, located in Switzerland, who are not protected by tariffs and are therefore vulnerable to price declines. In contrast, solar developers stand to benefit from a decrease in kit costs. Due to its high capital costs, offshore wind will always be less profitable than onshore wind and solar power. They are kept away from unpleasant surprises by the regulated network arms of diversified utilities such as Spain's Iberdrola, Britain's SSE, and Italy's Enel.
Green assets have dropped in price from their ridiculously high levels in 2021. According to LSEG data, SSE, Enel, and Iberdrola were trading lower than their long-term average multiples of expected EBITDA as of the end of November. RWE in Germany and Iberdrola have recently released results, indicating the possibility that Orsted's issues might be idiosyncratic. That suggests an easy entry point.