Soaring
costs
have
derailed
offshore
wind
projects,
threatening
climate
change
mitigation
efforts
and
depressing
valuations
of
wind
power
companies.
Is
it
time
for
investors
to
look
again
at
the
sector?
“We
see
several
challenges
for
participants
in
the
wind
energy
sector.
Wind
turbine
manufacturers
have
struggled
to
restore
profitability
from
unprecedent
cost
inflation
in
2021,
and
developers
of
wind
projects
have
recorded
billions
in
impairments
due
to
higher
equipment
costs
and
an
increase
in
interest
rates”,
Matthew
Donen,
equity
analyst
at
Morningstar,
explains.
On
top
of
challenges
within
the
sector,
wind
is
losing
ground
to
solar
in
terms
of
growth
and
adoption.
Morningstar’s
senior
equity
analyst
Tancrede
Fulop
states
that
among
the
European
utilities
companies
that
Morningstar
covers,
solar
accounted
for
37%
of
total
installations
in
2022,
50%
in
2023
and
84%
in
the
first
quarter
of
2024.
Fulop
says
this
reflects the
easing
of
supply
chain
constraints
after
legal
changes
in
the
US
in
2022,
the
fall
of
polysilicon
prices
due
to
Chinese
overcapacity,
companies
strategy
to
combine
with
batteries
with
solar.
European
Stocks
Exposed
to
Wind
Energy
According
to
Tancrede
Fulop,
turbine
prices
have
slightly
declined
in
Q4
2023
and
Q1
2024.
On
top
of
that,
wind
PPA
prices
have
also
slightly
declined
from
their
Q3
2023
peak
in
Europe,
although
they
remain
high
at
EUR
95/MWh
in
Q1
2024.
“Wind
projects
remain
value-accretive
despite
high
interest
rates”,
he
says.
The
main
opportunities
looking
ahead
stem
from
the
acceleration
of
the
energy
transition
evidenced
by
the
COP
28
conference’s
goal
of
tripling
renewable
capacity
by
2030,
as
well
as
high
electricity
demand
from
data
centers,
according
to
the
analyst.
Denmark’s
Ørsted
took
a
nosedive
late
September
last
year
after
ditching
the development
of
the
Ocean
Wind
1
and
2
projects
in
the
US, totalling
2.25
GW
of
capacity,
which
drove
more
than
DKK
36
billion
of
impairments
and
cancelation
fees.
“To
shore
up
its
balance
sheet
after
these
setbacks,
as
it
has
to
fund
future
projects
like
the
giant
Hornsea
3
one,
Ørsted
suspended
its
dividend
over
2023-25
and
cut
its
growth
ambitions”,
Tancrede
Fulop
explains.
Could
Trump
End
US
Wind
Energy?
A
favourable
political
environment
is
crucial
for
wind
projects’
success.
The
upcoming
election
in
the
US,
where
Ørsted
is
the
leading
offshore
wind
developer,
can
therefore
make
a
big
impact
on
the
sector.
Republican
presidential
nominee
Donald
Trump
promised
to
squelch
offshore
wind
development
on
his
first
day
back
in
office
through
an
executive
order,
and
told
oil
executives
he
“hates
wind”
in
April.
“We
think
it
would
be
difficult
for
Trump
to
roll
back
favourable
tax
policy
for
renewable
energy
enjoyed
from
the
2022
Inflation
Reduction
Act.
A
Trump
administration
might
be
able
to
slow
implementation
of
the
Act,
but
that
is
unlikely
to
slow
renewable
energy
growth
in
the
short-run”,
Matthew
Donen
says.
According
to
the
equity
analyst,
US
Congress
might
also be
reluctant
to
roll
back
the
renewable
energy
credits
since
they
have
generated
jobs
and
private
investment.
More
than
half
of
Act-related
investments
benefited
Republican
states,
according
to
a
Financial
Times
analysis.
Undervalued
Stocks
Exposed
to
the
Wind
Sector
Among
the
European
stocks
exposed
to
the
wind
sector
covered
by
Morningstar
analysts,
these
are
the
four
most
undervalued
right
now:
Ørsted ORSTED
Analyst: Tancrede
Fulop,
CFA
An
early
mover
in
offshore
wind,
Ørsted
benefited
from
the
decline
in
construction
costs
and
interest
rates
of
the
last
decade
while
getting
high
subsidies.
Ørsted is
the
leading
offshore
wind
developer
in
the
US,
but
since
the
end
of
2021,
the
offshore
wind
industry
has
been
hit
by
two
material
headwinds:
rising
construction
costs
and
interest
rates.
Ørsted
is
undervalued
according
to
Morningstar’s
analyst,
trading
at
a
26%
discount
compared
to
its
fair
value
estimate
of
DKK
540.
“I
see
limited
downside
risk
for
Ørsted
after
the
massive
setbacks
of
2023.
The
recent
deals
involving
financial
players
in
UK
and
US
offshore
wind
reflect
their
strong
appetite
despite
the
woes
faced
by
the
industry
since
2022.
This
bodes
well
for
Ørsted’s
future
farm-downs.
Recent
auctions
in
New
York
and
the
hike
of
the
ceiling
price
for
2024
UK
offshore
wind
auctions
show
increasing
political
support.
Ørsted
would
also
benefit
from
declining
interest
rates”,
Tancrede
Fulop
says.
SSE SSE
Analyst: Tancrede
Fulop,
CFA
British
energy
holding
company
SSE
is
trading
at
a
19%
discount
to
its
fair
value
estimate
of
GBP
22.
Its
wholesale
generation
unit
operates
roughly
10.8
gigawatts,
of
which
4
GW
is
of
hydro
and
wind
capacity.
“We
expect
renewables’
power
generation
to
be
the
main
earnings
growth
driver
on
the
commissioning
of
5
GW
of
new
onshore
and
offshore
wind
net
capacity
in
the
UK
through
fiscal
2028.
In
the
meantime,
renewables’
contribution
to
the
group’s
EBIT
will
increase
from
23%
to
46%
on
an
adjusted
basis”,
Morningstar’s
analyst
states.
Enel ENEL
Analyst: Tancrede
Fulop,
CFA
Enel
is
an
integrated
utility
operating
mainly
in
Italy,
Spain,
and
Latin
America.
The
grid
business
accounts
for
35%
of
the
group’s
earnings.
The
rest
comes
from
generation
and
supply.
The
power
generation
mix
is
dominated
by
renewables,
with
hydro
weighing
35%
of
the
installed
capacity,
and
solar
and
wind
at
32%.
“The
energy
crisis
of
2021-23
has
put
energy
affordability
at
the
forefront
of
the
political
agenda
for
European
countries,
increasing
political
risk.
Spain
implemented
a
power
price
cap
above
EUR
67/megawatt-hour
for
hydro
and
nuclear
plants
and
a
levy
on
energy
companies’
turnover.
Italy
implemented
a
cap
above
EUR
60/MWh
for
hydropower
generation
and
suspended
the
system
charges
collection
for
end-users,
which
materially
increased
Enel’s
working
capital
and
net
debt
in
2022”,
Tancrede
Fulop
states,
adding:
“To
shore
up
its
balance
sheet
and
maintain
its
dividend,
Enel
disclosed
a
EUR
15.2
billion
asset
sale
plan
in
November
2022
that
should
lead
the
group
to
exit
Romania,
Peru,
and
Argentina
to
focus
on
Italy,
Spain,
Brazil,
Chile,
and
Colombia.
In
March
2024,
EUR
10.4
billion
had
been
closed
or
signed
in
March
2024
at
attractive
multiples.”
RWE RWE
Analyst: Tancrede
Fulop,
CFA
With
the
acquisition
of
Consolidated
Edison’s
large
clean-energy
business
in
March
2023,
RWE
became
the
fourth-largest
renewables
firm
in
the
US,
an
attractive
market
according
to
Tancrede
Fulop,
especially
since
the
adoption
of
the
Inflation
Reduction
Act.
“All
said,
nearly
80%
of
RWE’s
EBITDA
will
come
from
wind
and
solar
in
the
medium
term.
That
means
a
derisked
profile
with
more
earnings
and
free
cash
flow
visibility.”
With
its
shares
trading
around
33.69
EUR,
Tancrede
Fulop
views
them
as
undervalued
compared
to
his
fair
value
estimate
of
48.00
EUR.
“Shares
sold
off
at
the
beginning
of
the
year
due
to
falling
power
prices
and
generation
spreads,
which
entailed
a
downward
revision
of
the
guidance
in
January.
Power
prices
have
rebounded
by
34%
from
the
February
lows
and
are
flat
year
to
date.
Yet,
RWE
shares
are
still
down
by
15%
since
the
beginning
of
the
year.
We
believe
that
continuing
strong
earnings,
a
likely
upgrade
of
2024
guidance,
and
a
pending
interest-rate
cut
by
the
European
Central
Bank
should
drive
a
rerating
of
the
stock”,
the
analyst
wrote
in
a
comment
dated
May
15th.
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