Renewable stocks try to find new ways to profitability

The S&P global clean energy index is down almost 60 per cent since its peak in January 2021, reflecting the increased cost of capital, supply and regulatory headaches, and pessimism about environmental, social and governance (ESG) oriented stocks. But key long-term trends underpinning the energy transition remain in place, as governments pursue decarbonisation and electricity demand grows.

More electricity in the EU was generated by wind and solar than fossil fuels in the first half of 2024, the first time this has happened in a six-month period, according to think tank Ember. A new London infrastructure listing has gone ahead, showing improved investor appetite for renewables as well. 

It's not all sunshine: recent updates have been decidedly mixed. Danish wind power developer giant Ørsted (DK:ORSTED)'s shares fell 7 per cent after it revealed further impairment charges and project issues in its half-year results, even as cash profits rose by a better-than-expected 38 per cent to DKr14bn (£1.6bn).

The DKr3.2bn of impairment charges in the half were small change compared with the DKr26.8bn posted across the 2023 financial year, but the market reaction highlights nervousness about renewables prospects. Orsted itself flagged an "immature supply chain" making existing timelines difficult to meet. The start date for the Revolution Wind project off Connecticut and Rhode Island has been pushed back a year into 2026 due to construction delays, while the development of an e-methanol plant in Sweden has been scrapped because of pricing and cost issues. Orsted shares are down by almost 30 per cent over the past year.

A new listing

While there are challenging ongoing headwinds to navigate, Orsted's terrible 2023 could have marked a nadir for the sector.

The wider context is one in which two-thirds of global energy investment will be spent on clean energy technologies and infrastructure this year, according to the International Energy Agency. This supports a robust medium- to long-term outlook.

Some positive news for renewables investors has come in the form of the admission of CK Infrastructure (CKI) to the main market of the London Stock Exchange on 19 August in a secondary listing. A consortium headed up by CK Infrastructure has agreed a £350mn deal to buy a portfolio of 32 operating onshore wind farms in the UK from Aviva (AV.) subsidiary Aviva Investors. The deal is expected to complete next month. CK Infrastructure also bought the Phoenix Energy gas distribution network in Northern Ireland and solar assets through the £90mn buyout of UU Solar in May. 

However, short-term difficulties are apparent. The higher cost environment has led Ørsted, EDP Renovaveis (PT:EDPT), Enel (IT:ENEL) and Europe's biggest utility, Iberdrola (ES:IBE), to cut investment plans or push back renewables-related targets. In July, Shell (SHEL) paused construction of a biofuels site in Rotterdam. 

And some renewables stocks are tempted to invest more in fossil fuels. RWE (DE:RWE) investors reacted negatively to reports of a potential purchase of a minority stake in US gas power producer Calpine. The German utility, which reported a more than 40 per cent decline in net income in its first half as wind and solar progress was offset by weakness elsewhere, is aiming to invest €55bn (£47bn) between 2024 and 2030 in a renewable energy drive. 

Bernstein analysts said a Calpine acquisition would mean "doubling down on unabated gas generation and 2030 emissions targets will likely be missed". They also said the immediate earnings uplift would not impress the ESG investors on the shareholder register, calling it a "valuation dilutive" deal. 

This raises the question of why a renewables company might want gas exposure. RWE chief executive Markus Krebber said on an analyst call that “the US power market is highly attractive with significant growth” and added that “we believe in [the] integrated position of renewables and flexible generation”. He didn't comment directly on the acquisition reports. 

The politics of renewables

Investors also need to consider growing political risks. The upcoming US election has added more uncertainty to the mix, given the potential repeal of the Inflation Reduction Act (IRA) under a second Trump administration. Morningstar senior equity analyst Tancrede Fulop said that “a Trump victory could be detrimental to the US offshore wind industry, potentially cancelling upcoming state auctions or discouraging bidders”.

This comes as top greenhouse gas emitter China builds up its renewables sector – the country's solar and wind power production increased by 171 terawatt hours (TWh) in the first half of 2024 according to the Centre for Research on Energy and Clean Air. China's overall electricity generation is around 9,200 TWh, double that of the US. Coal remains the dominant power source. 

In the UK, National Grid (NG.) could be boosted by new energy transition policy (the creation of Great British Energy and plans to improve grid connection backlogs) but this is by no means certain or risk-free. The company has earmarked £60bn of investment to decarbonise its energy systems, and confirmed alongside a huge £7bn rights issue that it would cut its dividend. 

Financial and political uncertainty has created some attractive valuation entry points. Ørsted trades on 17 times forward consensus earnings, almost 50 per cent below the five-year average, while SSE's (SSE) rating of 11 times compares favourably with National Grid and RWE on 13 times. Analysts at Deutsche Bank highlighted Solaria (ES:SLR) and ANE (ES:ANE) as renewables stocks which trade on significant discounts to historical positions.