As
part
of
Morningstar’s
special
report
week
on
thematic
investing,
we
look
at
the
prospects
for
clean
energy
stocks,
which
have
struggled
since
2020
–
as
well
as
the
wider
renewable
energy
industry.
The
energy
crisis
triggered
by
the
war
in
Ukraine,
combined
with
the
fight
against
climate
change
and
the
widespread
desire
to
decarbonise
the
economy,
has
given
an
extraordinary
boost
to
investments
in
renewable
energy,
particularly
in
Europe.
And
much
has
been
achieved
in
the
last
two
years
on
the
supply
side.
Figures
from
the
Ember thinktank
show
that
in
2023,
for
the
first
time,
the
share
of
European
electricity
generated
by
wind
power
surpassed
that
from
fossil
gas.
Last
year,
wind
and
solar
produced
a
record
27%
of
the
EU
bloc’s
electricity,
an
all-time
high.
Coal
and
gas
suffered
a
similar
decline,
with
the
former
dropping
to
an
all-time
low
of
just
12%
of
EU
electricity
production.
“The
European
energy
sector
is
in
the
midst
of
a
monumental
change,”
says
Sarah
Brown,
Europe
programme
director
at Ember.
“Fossil
fuels
are
playing
a
role
that
has
never
been
so
marginal,
while
a
system
is
emerging
with
wind
and
solar
as
the
backbone.”
Yet
the
Morningstar
category
of
sector
equity
alternative
energy
funds
(which
also
includes
ETFs)
posted
an
average
return
of
-11%
in
2022,
-10.5%
in
2023
and
-4.3%
for
the
year-to-date
(figures
in
euros,
as
of
April
15,
2024).
Within
this
group,
there
are
also
a
few
funds,
all
of
them
actively
managed,
that
have
managed
to
perform
much
better,
such
as
the
Pictet-Clean
Energy
Transition
or
the
RobecoSAM
Smart
Energy
Equities,
especially
in
2023.
Energy
Projects
Struggle
With
High
Interest
Rates
During
the
past
year,
four
factors
exerted
a
particularly
negative
impact:
interest
rate
hikes,
which
increased
the
cost
of
capital,
high
inflation,
which
increased
development
costs,
bottlenecks
in
the
network
and,
finally,
difficulties
in
supply
chains.
“The
most
important
factor
driving
this
long
underperformance
is
to
be
found
in
excess
capacity,
as
supply
is
more
than
sufficient
for
current
demand,”
says
Fabrizio
Arusa,
senior
relationship
manager
and
ETF
specialist
at
Invesco.
“This
weighs
on
margins,
although
it
does
represent
an
advantage:
competitive
pricing
relative
to
fossil
fuels
is
a
large
part
of
what
makes
this
strategy
viable
for
the
climate.”
“Factors
such
as
rising
interest
rates
particularly
affect
renewable
energy
companies
due
to
the
long-term
nature
of
their
cash
flows
and
leveraged
assets.
In
addition,
offshore
wind
plans,
especially
in
the
US,
have
faced
increased
risks
that
have
led
to
the
cancellation
of
some
projects,”
explains
Manuel
Losa,
senior
portfolio
manager
of
the
Pictet-Clean
Energy
Transition
fund.
Clean
energy
projects
are
subject
to
high
upfront
costs
and
have
a
high
sensitivity
to
interest
rates.
“To
give
some
numbers,
[power]
plants
typically
have
a
lifecycle
of
around
30
years
and
are
contracted
for
the
first
10-15
years.
However,
they
are
often
financed
with
debts
with
an
average
maturity
of
seven
years.
Existing
assets
developed
and
financed
during
a
period
of
lower
interest
rates
have
become
more
difficult
to
finance
in
the
current
environment,
which
has
been
challenging
for
power
producers
with
existing
operating
projects,”
says
Aanand
Venkatramanan,
head
of
ETF
EMEA
at
LGIM.
“It
is
important
to
remember,
however,
that
the
clean
energy
transition
is
not
limited
to
renewables
alone:
sectors
such
as
semiconductors,
green
buildings,
power
grids
and
electric
vehicles
also
play
a
significant
role,”
says
Pictet’s
Losa.
And
indeed,
the
Swiss
fund
manager’s
2023
strategy
was
able
to
outperform
the
MSCI
ACWI
index
largely
due
to
its
substantial
exposure
to
these
sectors.
Investing
and
the
Greenium
Effect
Passive
management,
on
the
other
hand,
struggled
more,
with
iShares
Global
Clean
Energy
UCITS
ETF
USD
(INRG)
the
most
high
profile
casualty
of
the
change
in
the
weather.
After
being
the
absolute
top
performer
in
2020,
the
fund
has
lost
around
43%
of
its
value
since
January
2021.
“Although
the
S&P
Global
Clean
Energy
Index
has
had
a
difficult
time,
the
clean
energy
segment
encompasses
a
wide
range
of
stocks,
so
a
distinction
needs
to
be
made
between
pure
players,
which
focus
exclusively
on
clean
technology,
and
the
rest
of
the
universe,
which
includes
renewables,
utilities
and
the
green
industry,”
explains
Natalia
Luna,
senior
thematic
investment
analyst
at
Columbia
Threadneedle
Investments.
“In
this
sense,
the
sharp
decline
can
be
attributed
to
the
correction
among
pure
thematic
players,
which
had
benefited
from
high
valuations
thanks
to
the
greenium
effect,
i.e.
the
willingness
of
investors
to
pay
a
premium
for
sustainability,
in
a
climate
of
enthusiasm
for
ESG
issues
that
had
fostered
substantial
inflows,”
Luna
continues.
“In
reality,
many
companies
experienced
negative
profitability
and,
in
the
face
of
a
more
difficult
macroeconomic
environment
that
led
to
a
reversal
of
ESG
inflows,
underwent
a
natural
correction.”
Another
important
dynamic
is
the
fact
that
the
last
two
years
have
seen
a
significant
drop
in
consumer
prices
for
renewable
energy,
despite
the
fact
that
there
has
been
a
significant
increase
in
production
costs
over
the
same
period,
creating
strong
pressure
on
company
margins.
Clean
Energy
Drivers:
Lower
Rates,
Cheap
Stocks
Valuations
of
clean
energy
stocks
experienced
a
real
boom
in
the
era
immediately
following
the
first
wave
of
coronavirus.
“These
valuations
reflected
excessive
optimism
about
project
fundamentals
as
well
as
the
macroeconomic
environment,”
according
to
LGIM’s
Venkatramanan.
Since
then,
however,
the
value
of
those
stocks
has
fallen
significantly.
“We
believe
that
the
market
valued
the
renewables
sector
excessively
negatively
in
2023,
adopting
a
generalised
approach
that
failed
to
capture
the
structural
support
factors
of
the
sector,
nor
distinguish
between
the
different
players,”
explains
Natalia
Luna.
“Despite
this,
our
investment
approach
to
the
energy
transition
has
not
changed
and
we
continue
to
forecast
positive
and
sustained
growth,
although
not
without
obstacles
related
to
the
timing
of
the
authorisation
process,
difficulties
along
the
supply
chain
and
an
increase
in
bottlenecks
in
the
grids.”
For
Invesco’s
Arusa,
the
current
valuations
of
the
investment
universe
are
“extremely
attractive”
to
date.
Moreover,
in
an
election
year
for
the
US
market,
a
Democrat
victory
is
“likely
to
prove
a
boon
for
clean
energy
stocks”.
“The
spike
in
interest
rates
provides
much-needed
valuation
support
to
the
renewable
energy
sector,
which
has
been
negatively
impacted
by
its
rapid
rise,”
says
Roman
Boner,
senior
portfolio
manager
of
the
RobecoSAM
Smart
Energy
Equities
strategy.
“We
believe
that
the
current
rise
in
capital
costs
is
only
a
temporary
setback
for
the
renewable
energy
sector,
as
growth
prospects
in
this
decade
remain
strong
and
financing
is
still
widely
available.
This
creates
attractive
entry
points
for
the
medium
to
long
term.
This
is
a
long-term
structural
issue
that
will
follow
a
non-linear
path
that
will
produce
winners
and
losers.”
Overall,
Boner
and
the
Robeco
management
team
also
remain
confident
about
the
outlook
for
earnings
in
2024,
even
in
the
face
of
a
more
challenging
macro
scenario
“as
high
energy
prices
and
the
urgent
need
for
energy
independence
act
as
catalysts
for
greater
investment
in
smart
energy
technologies.”
AI
and
Clean
Energy
Not
only
geopolitical
issues,
but
also
the
future
of
technology
is
pushing
us
towards
cleaner
and
cheaper
sources
of
electricity.
“In
fact,
it
is
estimated
that
the
demand
for
electricity
from
AI
(artificial
intelligence)
will
reach
in
a
few
years
the
level
of
the
current
demand
of
the
whole
of
Europe,”
says
Manuel
Losa.
According
to
Losa,
the
energy
transition
of
our
economy
passes
through
three
fundamental
changes:
“The
first
is
related
to
cleaner
electricity
generation,
with
renewable
sources
that
are
not
only
cleaner
but
also
cheaper.
The
second
is
widespread
electrification,
starting
with
sectors
such
as
transport
and
heating
of
buildings.
The
last
relates
to
increasing
energy
efficiency;
the
need
to
reduce
energy
use
and
increase
optimisation
is
becoming
increasingly
important.”
“The
increasing
efficiency
of
renewables
and
falling
prices
for
electric
vehicles
will
indeed
continue
to
drive
this
trend,”
says
Pictet’s
manager.
“We
firmly
believe
that
the
transition
to
a
clean
energy
future
is
inevitable,
despite
short-term
movements
in
commodity
prices
and
possible
policy
interventions.”
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