(News Bulletin 247) – The sector experienced an impressive surge during the pandemic and then during the outbreak of the war in Ukraine. But increases in rates and raw materials as well as recent profit warnings have hit valuations.

This is a theme that is supposed to benefit from very strong winds, particularly in terms of ESG subjects (environment, social, governance, extra-financial criteria): renewable energies.

Several of these stocks are present on the Paris Stock Exchange, such as Neoen or Voltalia, to name a few. However, these two stocks are moving very far from their peak reached at the end of 2020 or the beginning of 2021, with a fall of around 60% for both.

These two French examples do not constitute isolated cases, far from it. The S&P Global Clean Energy global index, which brings together around a hundred stocks in the sector (Vestas, Iberdrola, Orsted, First Solar) illustrates this perfectly. From 853 points at the start of 2020, this index experienced a sudden increase to 2113 points at the start of 2021 to plunge and currently evolve to 869 points.

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The great bubble of the pandemic

Which suggests that a bubble was created in 2020, the year of the pandemic. “The big bubble in the renewable energy sector formed during the pandemic, as Covid-19 shone a spotlight on the need to invest in renewable energy. Overnight, valuations reached a stratospheric level and it all had to explode. This is what happened at the start of 2021,” explains Martin Tessier, Vice-President, Utilities and Renewable Energy Equity Research at Stifel.

“At that date, renewable energy companies had reached valuation levels which included a speculative nature, with the market anticipating potential takeovers. The oil majors, which are seeking to diversify into renewables, were at the forefront of suspected buyers But several leaders in the sector, such as the CEO of TotalEnergies, Patrick Pouyanné, have spoken of a “bubble” in the market, contributing to its bursting,” he explains.

A second significant upward movement occurred last year. “Another bubble, this time more justified, was created in 2022, with the outbreak of the war in Ukraine. To simplify, the Europeans no longer had access to Russian gas and it was necessary to find available sources of energy and at low prices. Renewables ticked these two boxes quite well”, explains Martin Tessier.

“Fortunately Europe and more particularly Germany overcame this crisis by securing additional volumes of gas (in this case, LNG) to replace Russian gas, which made it possible to have only one winter tense, that of 2022. This good management of supply has allowed the price of gas to return to pre-crisis levels, reducing electricity prices with the final impact of a negative impact on the prices of companies in the sector renewable”, continues the analyst.

“Another effect is linked to the price of gas and electricity. By construction, the market prices of electricity depend on those of gas, and therefore with the surge in gas prices in 2022, those of electricity followed. The consequence is that producers of electricity from renewable energies have seen prices and therefore their income and profitability increase, leading to increases in “guidance” (perspectives, Editor’s note). Until this that European countries are introducing, albeit temporarily, price caps on energy prices”, Martin Tessier also argues.

“These price caps have calmed the stock market euphoria. Regulatory interventions and the stock market never go well together,” he concludes.

Increases in rates, raw materials and profit warnings

So much for the context of recent years. But beyond these burst bubbles, other factors may have come into play as the S&P Clean Energy index has plunged by more than 30% since the start of the year.

The rise in bond yields has clearly weighed on the sector, to the extent that renewable energy groups remain growth stocks, and therefore by construction, their valuations are weighed down by rate increases. A bit like tech.

The surge in commodity prices is also penalizing these securities. “In solar, the prices of polysilicum, the basic material of solar panels (30% to 40% of the total cost), increased significantly following the pandemic in 2020, but they are down 75% on last 12 months, and are again close to their pre-pandemic level, which bodes well for developers of photovoltaic projects. On the other hand, the costs of metals in wind power, such as steel, aluminum, cement, remain high, especially since for offshore we must add the price of maritime transport”, lists Martin Tessier.

This adds to the concerns already well known to the sector. “There is a significant profitability problem in this sector, with electricity acquisition prices which are not high enough for these projects, and governments will have to look into this issue,” underlines Benjamin Louvet, head of raw materials management at OFI Invest Asset Management and co-author of the book “Metaux the new black gold”

which has just been published.

“Projects also take time. An offshore wind farm requires a little more than 10 years to set up.” “The duration of obtaining permits is long (more than two years in wind power although this threshold has been set as a maximum by the European Union),” he continues.

Warnings on results from major players have also done little to help the market regain confidence. At the end of June, Siemens Energy, a division of the German conglomerate Siemens listed separately in Frankfurt, abandoned its profitability target for 2023, following difficulties at its Spanish subsidiary Siemens Gamesa. The latter then reported a significant increase in failures of technical components in its wind turbines.

More recently, at the end of August, the Danish Orsted announced a total of 16 billion Danish crowns (2.2 billion euros) in “impairments” (depreciation) linked to three offshore wind projects in the United States. This is due to delays with suppliers, difficulties in obtaining certain tax advantages from the American administration, and higher financing costs due to rising rates.

“This announcement, specific to Orsted and offshore wind power in the United States, has spread to all renewables, all technologies and geographies combined. Wrongly, because the situation is much less catastrophic for other technologies, particularly in solar. The emotional factor played a lot in the recent fall of the sector,” judges Martin Tessier of Stifel.


With these declines, potential entry points may appear for investors. “There may be good stock market opportunities in solar, where unit capex (investment spending, editor’s note) is down 10-20% over the last 12 months, and where social acceptance is significantly higher than in offshore and onshore wind power”, points out Martin Tessier.

While the oil majors have been reluctant to buy targets in the sector, can they change gear when making acquisitions?

“The valuation can today be attractive to certain players with a view to potential takeovers. The sector is now trading at around 9x times 2024 Ebitda, compared to 14-15x times previously. The EV/MW ratio (enterprise value per megawatt, Editor’s note) of European operators comes out to €900k/MW, approximately the same level as the current average unit capex for onshore solar and wind power”, estimates Martin Tessier in any case.

The expert, however, considers that valuations should not be driven further by any increased market enthusiasm for ESG issues. “The ESG theme works especially in a bullish market. In a bear market, economic fundamentals and financial theory take over,” he explains.