The share of Britain’s energy mix coming from renewable resources has consistently reached new highs during 2020 and this has continued through the current crisis due to favourable weather conditions and changing demand patterns. Data shows that in Q1 renewable energy accounted for over 40% of Britain’s energy for the first time. During February, as a result of stormy conditions, wind power contributed 30.5% of the energy mix and since then sunny conditions and lower pollution levels led to solar farms generating nearly 30% of power in the grid at their peak during April.
From a financing and investment perspective however, there is growing concern about the longer term impact that the drop off in economic activity due to COVID-19 will have on demand for electricity and future renewables development. Demand fell 14% in April and average electricity prices were circa 40% lower than for the same period in 2019. While many existing renewable energy projects benefit from government subsidies which dampen the impact of negative market movements, the impact on unsubsidised projects currently under development could be substantial if conditions persist.
On a global basis, the International Energy Association (IEA) predicts overall investment in the power sector will decline by 10% in 2020 and that oil and gas could be hit even harder, falling by as much as 30% worldwide. This will lead to an increased share of total global energy investment flowing towards renewables but only due to the decline in fossil fuel investment and not in absolute terms.
Looking deeper into the financial performance of renewable energy investments versus the broader market and, more specifically, fossil fuels, a number of ‘reasons to be cheerful’ emerge to support continued investment in renewables:
1) Renewables have outperformed equity markets during COVID-19
Gneiss Energy’s analysis shows that London-listed renewable energy funds have outperformed the main FTSE indices since the start of the COVID-19 crisis in the UK. Similarly, in the United States a report by Imperial College London and the IEA recently highlighted that US clean power stocks fell only 2.2% versus a fall of 9.4% in the S&P 500 during the first four months of 2020.
2) Renewables have outperformed fossil fuels and this looks set to continue
The Imperial College/IEA report also concluded that over the last 5 years publicly traded renewable energy stocks in the US, UK, Germany and France delivered higher total returns and lower volatility for investors than their oil and gas counterparts. In the US, where the data set for renewables companies is largest, the study found that from 2015 to 2019 renewables stocks returned 200.3% compared with 97.2% for fossil fuel companies.
In addition, Wood Mackenzie recently highlighted that while PPA-backed renewables projects historically offered lower internal rates of return than fossil fuel projects at higher oil prices, increased returns from unsubsidised, merchant-risk renewables projects now make them competitive when compared with equivalent oil projects at US$35/bbl (Source: Wood Mackenzie).
3) A continued and increasing focus on ESG
The focus on Environmental, Social and Governance (ESG) aspects of investment which has grown substantially in recent times shows no sign of abating and, if anything, has increased during the COVID-19 crisis. Investors now see a direct link between high ESG ratings and investment performance and companies must embed ESG considerations into all their activities.
The transition to renewable energy is one of the more easily understood aspects of an ESG analysis and all types of companies are now switching to renewable energy and low carbon operations to ensure their continued access to institutional capital. As a result, strong ideological and commercial fundamentals exist to underpin renewables investment going forward.
Against the backdrop of market volatility, lower oil prices and a focus on ESG considerations, we are highly confident that the stable long term returns from renewable energy investments will remain attractive for institutional investors and capital will increasingly be allocated to the sector.
Gneiss Energy’s Cleantech and Renewables team is at the forefront of this process, introducing substantial renewable energy investment opportunities to our network of leading pension fund and institutional investors and advising our clients on how to structure transactions and access capital.
For more information on our service offerings, click here.