Renewable energy is still not raising its head: will it be profitable to invest in this sector again?

The green transition to less polluting energy, also accelerated by Russia’s invasion of Ukraine, seemed to paint a promising future for investment in renewable energy. However, the sector took a major beating in the stock market last year and until a more favorable rate scenario is developed, it will struggle to recover.

Renewable energy companies were severely punished in the stock market last year, and things don’t seem to have improved as 2024 begins. In Ibex 35, the two great pure players of the sector such as Acciona Energías Renovables and Solaria are the two ugly ducklings of the selection at the beginning of January, with the sole exception of Grifols.

Solaria shares are already down more than 21% in just over two weeks of the year, largely erasing the acceleration it experienced in the final period of 2023 and which saw it end the year with an accumulated overvaluation of 8.70. %. However, this behavior was far from the 22.7% recorded by Ibex 35.

Solarium Quote

Meanwhile, Acciona Energías Renovables is already down 17% in 2024, following the bearish trail of a memorable 2023 when it fell 20.5%. The price of the Acciona subsidiary is almost 13% lower than the 26.73 euros at which it debuted on the stock market in July 2021.

Quote from Axion Energy

But this is not just a problem for the Spanish stock market. He S&P Global Clean Energy Indexwhich includes 100 of the largest enterprises in the field of solar, wind and other renewable energy sources, fell by 35.7% over the past yearand if you look at the last three years, it has accumulated a negative annualized return of 23.3%.

The renewable energy sector has been particularly vulnerable to sharp rises in interest rates over the past year and a half as many companies agree to long-term contracts, setting the price at which they will sell energy before developing their projects.

As global inflation has risen, clean energy companies have faced huge cost increases, exacerbated by growing demand for renewable energy projects, while high rates have made servicing their high levels of debt more expensive.

S&P Global Clean Energy Index

Until there is a clear downward trend in interest rates, it will be difficult for the stock market to react.because the profitability of their projects suffers because these companies operate with high leverage,” he explained recently. Juan José Fernandez-Figares, Director of Research at Link Securities.

“I think you will have to wait to position yourself in this sector. “It’s also starting to get very crowded, which makes projects more expensive due to competition.”

The market had expected rate cuts could begin in March, but officials at the Federal Reserve and European Central Bank (ECB) have cooled those expectations in recent weeks, pointing toward the summer. Moreover, it is unclear whether this process can be as fast as in other cases, and in any case it seems difficult to return to a new era of negative rates.

Help for renewable energy

The truth is that the stock market’s penalization of renewable energy comes even as governments offer tens of billions in tax breaks, subsidies and loans to green energy companies in the US and Europe.

On the Old Continent, last December the European Parliament, the Council and the European Commission reached a preliminary agreement on electricity market reform. These measures include allowing Member States exclusively support the purchase of new generation of renewable energy, when conditions allow, through power purchase agreements criteria have been established for declaring a crisis associated with high prices. The possibility of reducing electricity prices for vulnerable and low-income consumers is also being considered.

The goals of market reform are to protect consumers from price volatility by reducing fossil fuel price volatility; reduce energy prices and allow consumers to benefit from the low costs of renewable energy; provide confidence and greater transparency for producers and consumers; and accelerate the energy transition by promoting renewable energy and reducing dependence on gas.

“This is an evolution of the current market system rather than a profound change, since the intraday market retains a marginalist pricing system so that the most expensive technology, usually gas, sets the price for other forms of generation,” explains Aransas Bueno, Bankinter analyst. “However, it helps reduce exposure to this volatile market by encouraging the development of forward markets such as government-backed bilateral contracts for differences (CfDs) and private sector power purchase agreements (PPAs).

However, in the long term, analysts seem confident that the situation will improve. Both Solaria and Acciona Energías Renovables have potential of more than 40%, according to analyst consensus compiled by Reuters. For Solaria, the majority rate is “buy” and the target price is €21.76. 47.7% higher current price. The majority also recommend Acciona’s renewable energy subsidiary as a Buy, with a valuation of €33.43, representing growth potential 43.5%.

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