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Crises  bring opportunities in renewables

The recent geopolitical crisis and a likely ban on Russian oil and gas exports are bringing energy security back in focus. Governments have focused on promoting renewable energy sources.

Why renewables? Because on the one hand their zero-carbon-emission profile helps to reduce our carbon print and on the other hand their omnipresence in nature allows regions with limited resources to produce energy locally and ensure energy independence.

In 2020, renewables were the only energysources with increased demand. Renewable energy is derived from natural sources such as hydropower, solar, geothermal, wind, and bioenergy. Rapid technology improvements and decreasing costs of renewable energy resources, along with the increased competitiveness of battery storage, have made renewables one of the most competitive energy sources in many areas.

 

The   global   renewable     energy market was valued at USD882 billion in 2020 and is projected to reach USD1’978 billion by 2030. The sub-industry collectively provides roughly 12% of the world’s energy demand as of today meaning the potential growth of the global renewable energy market is enormous.

 

 

The  Asia-Pacific  renewable   energy   market

 accounted for 35.2% of the renewable energy market share in 2020. Economies such as China and India are expected to drive demand higher. China is one of the key players in hydropower, onshore, wind power, and solar photovoltaic. Similarly, Latam is also seeing increasing interest in renewables. A significant amount of hydropower development took place in Brazil, and projects of the same nature are taking place in Colombia and Peru.

Key European players

There are three groups of key players; vertically integrated utilities, oil majors, and pure-plays. The following figure summarizes the installed capacity and that under construction of European renewable energy producers at the end of 2021.

The largest pure-play renewable is EDPR with nearly 14GW of onshore wind. Other pure players, including Neoen, Scatec, Solaria, and Grenergy are by their nature, smaller, but exclusively focused on renewables.

For   smaller   pure-play     renewables     companies, it is increasingly difficult to compete with utilities or oil majors on large-scale projects. Large oil companies see renewables complementing their value chain, facilitating to provide integrated solutions to solve the energy trilemma. Their local knowledge and their ability to manage complex supply chains are likely to allow them to ramp up their renewable capacity quickly. Inorganic growth is also an option, as it was seen in the case of TotalEnergies’ USD2.5bn acquisition of a 20% equity stake in Adani, an Indian renewable energy company.

Two  other    factors    are     companies’ technological focus and geographical presence. Being focused on a singly geographical area could create concentration (country) risk. Similarly, being too diversified increases the likelihood of being spread too thinly across many countries and not benefiting the most from economies of scale. Therefore, companies that have balanced positions with respect to these two factors should be able to remain immune to monopolistic and technological threats.

Alternative technologies - green hydrogen

For an industry that has largely focused on solar and wind, alternative technologies should start to take a bigger share of the energy pie. One example is green hydrogen — a universal, light, and highly reactive fuel. Green hydrogen is hydrogen that's been produced exclusively from renewable power through a chemical process known as electrolysis. The main advantage of green hydrogen is that it can act as seasonal storage of fuel available on-demand to generate power. Hydrogen as a fuel is a reality in many developed countries, and some like Japan are going even further and aspire to become a hydrogen economy. The global green hydrogen market size is valued at USD1.8 billion in 2021 and is expected to reach USD90 billion by 2030, which is an average annual growth rate of nearly 53% from 2021 to 2030.

Other technologies to keep an eye on are Advanced Small Modular Reactors, fusion, and tidal which are also likely to play a bigger role in the future.

Risks

This thematic has helped boost the share price of renewables over the past two years as the rise in energy costs made renewables more competitive. However, investors should keep in mind the current macro-environment. Nothing is safe from the threat of cost-push inflation and logistics bottlenecks. These factors could hit the renewables sector as well, putting a brake on the ambitious capacity ramp-up rate, and destroying value for growth companies. In the near term, the higher input costs triggered by the conflict could further bring negative surprises on earnings. Raising interest rates could also hurt the developers as most of their assets are project financed.

So what?

The green energy trend is here to stay. The space is set to see large capital inflows, especially as supportive policies start to push through. But the sector will have its winners and losers as efficiency in production, transport, and storage of energy will remain key differentiators. Our preference goes for companies that have regional leadership with a focus on superior technology.

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