Investment potential in renewable energy

"Many reasons to be optimistic"

We asked Hannes Loacker, fund manager for Raiffeisen-SmartEnergy-ESG-Aktien about this trend, and also wanted to know what potential he sees in renewable energy over the coming years.

Investors in renewable energy have needed steady nerves or a great deal of inner calm over the past two years. What were or are the reasons for the significant performance declines?

Hannes Loacker: The high interest rates were a serious challenge for many companies in the sector and put pressure on the shares. But this was not the only factor. There were also delivery problems, project delays, and very fierce competition with China, especially with regard to photovoltaic modules. Some companies also failed to agree inflation adjustments for projects in advance, adding to the difficulties.

The market rebounded noticeably in part in the final quarter of 2023. Why?

The international equity markets have been significantly stronger in general over the past weeks. Along with the better-than-expected economic data, especially in the USA, the equity markets also gained support in recent weeks from a marked decline in bond yields – and the simultaneous emergence of hopes of interest rate cuts.

In August 2022, the Inflation Reduction Act (IRA) was passed in the USA. What does this mean for renewables over the medium term?

This law is extremely important. In the USA, some names surged briefly by as much as 40% after the ratification. The IRA is the most important piece of climate legislation in the history of the USA and should cut greenhouse gas emissions to 40% below 2005 levels by 2030. More than USD 370 billion is to be invested in clean energy, environmental justice, and climate protection. Through the planned measures, investments in new energy infrastructure totalling USD 3,500 billion are to be initiated, above all in wind and solar energy systems but also in the production of hydrogen and in the provision of components for clean energy such as batteries and in the mining and processing of critical minerals. This should lend a definite boost to the sector and thus to the equity market.

The law entails very strong support for US manufacturing – in part to counter China’s cheap goods. How is the European Union reacting to this?

The EU welcomes the objective of the IRA in general, namely to fight global climate change and to promote the political objectives of a green transition. However, it also fears that the broad spectrum of domestic content clauses in the IRA will have a negative impact on EU manufacturers in key technology segments such as automobile manufacturing, batteries, hydrogen, and renewable energy. And we have already seen the first instances of site changes. One of the few manufacturers of solar cells and solar modules, the Swiss company Meyer Burger, has announced that it will be relocating its manufacturing facility from Germany to the USA. This means that European policymakers must act more quickly and take action against the dominance of China in the solar segment in particular if the EU is not to drift into irrelevance in this sector. In global terms, however, the solar industry is a very interesting investment segment and still has considerable growth potential – thanks to the IRA and the global climate targets.

Wind power has also gained momentum again after being stuck in the doldrums for a while…

Yes, especially the higher raw material prices put pressure on margins here. And there were political hurdles. In September, Great Britain set a price that was much too low, namely only GBP 44 per megawatt hour including grid connection costs, in its fifth auction round in which the government sets the price for offshore wind farms. But considering the inflation in the costs for offshore wind farms over the past two years, it is impossible to build such facilities at this price. Because of this, not a single offshore wind project took part in the auction. This was a clear lesson for the British government, and likely also other governments. Because projects of this importance will play a key role in reaching the climate targets. In the following auction round, the British government raised the price to GBP 73 per megawatt hour.

So the prospects for wind power are still good?

Yes, companies like Vestas and Nordex are reporting record levels of new orders for wind turbines. Not only are they seeing more orders, these orders are also significantly more attractive as in the past and offer better margins. The outlook here has improved significantly.

Hydrogen was long a great source of hope within renewables. Are we likely to see any major developments with hydrogen in the near future?

The topic of green hydrogen gained no traction at all last year. Capacity is only being built up here very slowly, more slowly than originally expected. The companies that are active in this segment are still simply burning through too much cash. But it will likely be successful over the longer term. And there is no way around green hydrogen if we are to reach net zero emissions. But I don’t think that the time is yet ripe for more significant investments.

The COP28 was held in Dubai in November. Was this a success for renewables?

One definitely positive aspect was that the participating countries officially committed for the first time to tripling renewable energy by 2030, and that an exit from fossil fuels – oil and gas in addition to coal – was agreed. We just now need to see actions to back up these promises. The trend is already moving in the right direction in general. The IEA, the International Energy Agency, calculated that for every US dollar spent on fossil fuels, USD 1.70 is being put into clean energy around the world. That is a success. Five years ago, this ratio was still 1:1. The global share of renewable energy has risen by 40% since 2020, and in 2023, 80% of the new capacity that is built will be a form of renewable energy. Fossil fuels will play an increasingly diminishing role.

This should be reflected in investments in renewable energy over the medium and longer term…

I am fairly certain of this. Right now, one billion US dollars goes into solar investments every single day of the year. That is massive. In China, for example, investments in photovoltaic systems and offshore wind farms will be three times as high in 2030 as in 2021. A look at the share of fossil fuels in the overall global market over the past ten years always shows figures of around 80%. For the first time, this has fallen to 73% – and is heading further down. The IEA projects that demand for fossil energy sources will peak before 2030. The development of electromobility also reflects this trend: In 2020, one of 25 newly registered cars in the world was an electric vehicle. In 2023, one in five was electric. Nevertheless, we must acknowledge that the consumption of crude oil is rising continuously. The reason for this is aviation and the petrochemical industry.

Are there any developments towards more sustainability in flying?

Yes, things are happening here. But it will take quite some time. In addition, there are not sufficient quantities of sustainable aviation fuels. It is important that something happens here, as well, and there are cooperation projects under way, but it will take a while. Green hydrogen can definitely play a role here. Airbus has come out with the first aircraft models for this, but they are not scheduled to launch on the market until 2035 – and this will likely be delayed further, so is still a long way away.

Looking at the near future, the next 12 months. What are your expectations for investments in renewables?

I think that investors have many reasons to be optimistic. Enormous amounts of capital are being put into renewable energy, not just in the USA but also in Europe where we are implementing the EU’s Green Deal – which will also have a positive effect. Shares are currently at low levels, near a cyclical low. Once the major central banks make their first key rate cuts, equities should deliver better performance again. The PER levels have declined by 50% since 2021 in some cases. That means a large number of good buy opportunities. Right now, these shares are highly dependent on the development of interest rates, and will remain so in the coming months. But when the interest rates start moving down again, other factors will come back to the forefront. This could pave the way for very rapid, very substantial upward movements because investments in renewables are rising every quarter. And this will continue for a very long time.

The fund Raiffeisen-SmartEnergy-ESG-Aktien exhibits 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.