Fra Julius Bär:
Is clean energy becoming a victim of its own success?
Clean energy is a booming business these days. Solar, wind, and battery technologies are cost-competitive solutions, the business is mature, and governments are highly supportive. Nevertheless, the investment theme has been underperforming global equities since the beginning of the year. The reasons remain elusive. The market mood remained rather risk-friendly overall and offered substantial valuation support for other growth themes, except for clean energy. For once, financial markets appear more rational than emotional.
Our experts foresee a period of consolidation on the horizon in the clean energy market.
The scepticism could reflect the emerging headwinds. Firstly, the substantial investments in manufacturing capacity will eventually weigh on product prices and margins. Generous subsidies, such as those offered by the US Inflation Reduction Act, will only accelerate these dynamics. Secondly, the strong growth in solar and wind generation will eventually depress electricity prices.
In Europe, the past weeks’ and months’ sunny days came with excess solar generation, leaving a marked dent in electricity prices and weighing on power producers’ revenues and cash flows. Finally, energy is moving from scarcity to abundance. Global natural gas and coal prices have already eased substantially, and the start-up of export projects beyond 2025 should lead to a period of depressed natural gas and electricity prices.
The clean energy business therefore risks becoming a victim of its own success. These market dynamics could lead to another period of consolidation, like in the early 2010s. The structural trends of decarbonisation and the energy transition are strong, but investors should not forget that clean energy is an inherently cyclical business. Based on this outlook, we downgraded our view to Neutral last week and closed our investment idea.
