Green revolution re-energises utility stocks
  • Falling renewable energy costs should continue to provide a key tailwind for clean energy companies.
  • New energy policies are being introduced by many countries to curb their greenhouse gas emissions with recent months seeing signs of greater ambition.
  • Many countries, particularly in Europe, are boosting clean energy as part of their post pandemic economic stimulus funding.

After three straight years of stellar performance, European renewable energy stocks have fallen back to earth in 2021. But the future is still bright for green power as the world’s transition to a low-carbon economy gathers pace.

In the short term, investor concerns about rising bond yields and inflation have dragged down the utilities sector. And a flood of cash into environmentally friendly investments in recent years has spurred fears of a green bubble.

However, in my view, the fundamentals of Europe’s largest clean energy companies remain strong. 

Clean energy is benefiting from three important secular tailwinds: falling renewable costs, new energy policies and economic stimulus. I call these factors the “Green Trifecta”. Moreover, the dominant companies, most of them based in Europe, have many advantages: a long runway of growth opportunities, strong development pipelines and development teams, significant scale benefits, robust balance sheets to fund investments and the benefit of vertical integration that many new entrants typically struggle to match. Although many investors continue to view these companies as bond proxies, there is potential for secular growth for many years.

Falling renewable costs

The biggest reason I expect clean energy companies to do well is that renewable technology just keeps getting cheaper.

Renewables are already economically competitive as it is. And the cost of building a megawatt of clean power generation - whether that's onshore wind, offshore wind, or solar photovoltaic - is falling and should continue to do so.

Every year, the average cost of production probably falls by between 10% and 15%. The same is true for the costs of battery storage or green hydrogen. I have yet to see any meaningful slowdown in the rate of cost reduction.

Change in lifetime cost of energy from 2010 to 20181

Change in lifetime cost of energy from 2010 to 20181: offshore wind, onshore wind and solar photovoltaic

As new technology is developed and renewable companies scale up, costs should fall even further. Take offshore wind, for example. Machines are getting bigger. Technologies to install and to build turbines are changing rapidly and the supply chain is evolving.

Denmark’s Orsted has established itself as a leader in this market by developing its own engineering, operation and maintenance skills. And there is scope to further industrialise the manufacturing process materially. Costs should continue to decline at pace.

So-called “learning effects” are playing a substantial role here. This is still an immature industry, and companies are consistently learning how to operate more efficiently.

Green hydrogen will be an important area to watch. It is seen by many experts as the key to decarbonising industries like steel and shipping. Hydrogen gas is still expensive to produce without using fossil fuels, but this appears to be the next big energy transition technology.

If I map the improvements that are coming on the cost of the technology used to create green hydrogen, plus where the cost of clean energy is headed, I can see a really significant reduction in costs. They could fall by as much as three quarters over the next five to 10 years, which is very similar to what happened in solar and onshore wind over the last decade or so.


1. Source: UN Environmental Program; International Renewable Energy Agency


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