Companies active in green energy, including solar, wind and hydro power generation, have been in high demand since the war in Ukraine forced world economies to replace Russian oil and gas as quickly as possible and to accelerate the green transition.
By Esty Dwek, CIO
Share prices of the most popular companies in the renewable energy industry have rallied impressively since the start of the war. In this regard, the biggest names in the industry have seen their prices soar. Enphase Energy, for example, saw its price nearly double between February and April, SunPower gained 80% while First Solar recorded a gain of more than 40% in just a few weeks. Yet the gains remained short-lived, raising the question of whether the rally in green tech is another wave of a speculative bubble already in place, or whether the gains could be long-lasting.
The growth potential is real
Carbon-based fossil fuels provide about 85% of the world’s energy needs, leaving renewables a meager market share in the global energy portfolio. There is therefore significant growth potential for the sector, especially as installation costs drop significantly as clean energy generation capacities increase, making green energy technologies more affordable and more powerful for customers.
Over the past decade, onshore wind installation costs have fallen by more than 30%, while wind capacity has more than tripled. During the same period, the cost of installing solar photovoltaic (PV), which converts light into electricity, has fallen by around 80%.
A rapid migration, which is accelerating
The use of renewable energy increased by 3% in 2020, as demand for all other fuels fell according to the latest Global Energy report published by the International Energy Agency (IEA). The main driver was a nearly 7% growth in electricity generation from renewable sources, which followed a 45% increase in the amount of renewable electricity compared to the previous year. The latter was the biggest year-on-year increase since 1999, according to the IEA.
This trend should accelerate significantly in 2022 given the war in Ukraine and the European desire to quickly move away from Russian energy. And time is running out; Russia has decided to halt gas exports to Poland and Bulgaria, while NATO and other countries consider replacements for Russian fossil fuel and potential bans on Russian energy imports.
In addition, the fight against climate change is intensifying, given the increased severity of the threat to the planet. According to the International Energy Agency, around 88% of all energy production must be renewable by 2050 to limit global warming to 1.5 degrees Celsius. Wind power and solar power will play a leading role in ensuring that the target is met.
Thus, renewable electricity production in 2021 should increase by more than 8% to reach 300 TWh, according to the IEA, which would be the fastest annual growth since the 1970s. Solar photovoltaic and wind should contribute two-thirds of the growth in renewables. China alone is expected to account for almost half of the global increase in renewable electricity in 2021, followed by the United States, the European Union and India.
The industry is expected to at least double in the next ten years
Green energy was already well on its way to becoming the ‘new normal’, and this trend has become clearer since the start of the war in Ukraine.
According to data published by Allied Market Research, the value of renewable energy was $881.7 billion in 2020 and the industry is expected to reach $1,977.6 billion by 2030 with a cumulative annual growth rate of 8.4% in 2030.
This growth potential makes renewable stocks a must-have allocation for investors. Of course, some of the rising prices of renewable energy companies is speculative, but much of it is due to the growth outlook and very favorable fundamentals.
The sector has returned almost 160% since the end of 2019 and has the potential to outperform the S&P500 in 2022, despite some challenges.
Overcome tighter monetary conditions and supply chain constraints
Green energy companies are growth oriented; they are poised to provide strong potential earnings for investors looking to add growth to their portfolios while taking advantage of the sustainability trend.
But they also face some challenges, including tighter monetary policies, supply constraints and rising commodity prices.
Tighter monetary policies
While growth stocks are expected to remain under pressure from tighter central bank policy and steep interest rate hikes to tame inflation, much of the rise in consumer prices is due to rising energy costs.
Thus, rising household energy bills should accelerate the transition to green energy sources and green technology stocks could continue to perform well, even with the outlook for higher inflation and rising interest rates. global interest.
Despite supply chain constraints due to the Covid pandemic, rising shipping costs and rising prices for key commodities, capacity installations remain at an all-time high to accelerate the energy transition.
Enphase Energy, the world’s largest supplier of microinverter-based solar and battery systems, announced in early April that it had extended its relationship with Flex to increase global capacity and improve delivery to customers in Europe.
SolarEdge, meanwhile, said it plans to issue more shares to fund potential acquisitions, while SunPower and First Solar prepare to team up to produce solar models that could be available to customers in the near future. next eighteen months defying supply constraints and commodity price inflation.
In addition, the renewable energy industry benefits from strong government subsidies to accelerate the green transition. These should also continue to drive the transition to renewable energy and support rapid industry growth that will be reflected in the stock prices of green companies over the medium to long term.
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