Investment conclusions from 2023’s clean energy sell-off
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Investment conclusions from 2023’s clean energy sell-off

The clean energy index had a tough 2023, but we believe there was an overreaction in markets that didn’t appreciate the nuance of the energy transition.

As long-term investors it is always important to take a step back, assess the bigger picture, understand the moving parts and appreciate the nuances. The energy transition is a structural theme that demands just that approach. It is going to play out across multiple decades and will create structural growth – but rarely in a straight manner. As we always say, the journey is going to be bumpy. The sell off in clean energy last year was a bump on this road.

Clean energy stocks materially underperformed the market in 2023. This was due to a combination of negative company-specific developments and industry headwinds that caused investor confusion and generated many negative headlines. The thematic and industry analyst teams at Columbia Threadneedle Investments did a deep dive in order to separate the noise from the fundamentals, the idiosyncratic events from wider industry challenges, and assess the investment opportunities.

The S&P Global Clean Energy Index had a difficult year (Figure 1). However, the clean energy universe includes a wide range of stocks, so we must differentiate between the pure thematic clean tech players and the rest of the universe that includes renewables, utilities and green industrials.

Figure 1 : A comparative struggle for clean tech stocks

Fig 1 - A comparative struggle for clean tech stocks

Source: Columbia Threadneedle Investments, 2 January 2023 – 29 December 2023

In our analysis, however, we applied a narrower focus on the clean energy universe and looked at utilities as they are behind the large investments in the shift to clean energy.

Utility firms also underperformed the market but not as much as clean tech (Figure 2). It is useful to reflect on utilities over the past five years and how they got here. We think they peaked in 2020/21 when the energy transition became fundamental – not just in terms of decarbonisation but for energy security. In this period we saw good growth and pricing visibility. From 2021-23, however, the focus moved to returns. As a capital-intensive industry, the macro environment challenged the economics of utilities. As we will explain, we think that despite macro pressures, returns were largely preserved.

However, it is true that the utilities sector suffered a large pullback in Q4, largely driven by negative developments at two large renewables players, Orsted and NextEra.1 These companies were viewed as the darlings of the renewables story, and a combination of idiosyncratic issues at these businesses, and wider negative sentiment, dragged the whole space down.

Figure 2 : A tough Q4 for renewables players

Fig 2 - A tough Q4 for renewables players

Source: Columbia Threadneedle Investments, 2 January 2023 – 29 December 2023

Company-specific developments

Orsted is the world’s largest offshore wind developer2. It built a large catalogue of projects before the Covid pandemic when inflation and interest rates were low. When rates and inflation picked up it was locked into very expensive projects that were now uneconomic.

The broader issues affecting the company also underscore the systemic challenges the wider offshore industry faces that the market did not necessarily appreciate. These include:

  • Offshore wind projects are more capex intensive than solar and onshore given their complexity and longer permitting timelines.
  • Offshore supply chains are immature and complex, facing delays, bottlenecks and design issues. Hence it faces big inflationary pressures, for example, labour and shipping costs.
  • Whilst renewables and power prices were all rising – and solar and onshore wind were able to more than pass through the costs – offshore wind projects, due to their size and scale, go through auctions run by governments/regulators, who were not raising prices. This added to pressure on returns

Due to such challenges, many projects became uneconomic and were cancelled, or developers didn’t bid for projects as the price offered was too low. However, towards the end of the year we started to see positive signals from governments in support of the offshore wind industry, such as announcing increases of auction prices in New York3 and UK4 auctions for example.

Such challenges are unique to the offshore industry. We believe they are being fixed, so the industry is not “broken”, it is simply readjusting. However, the market incorrectly extrapolated

them to the whole utilities sector without discriminating between renewable technologies, networks and companies.

NextEra, meanwhile, is the largest renewable developer in the US5. In September, NextEra Partners, a yieldco funding structure 51% owned by NextEra, lowered its distribution rate alluding to higher financing costs. This spooked markets and NextEra dropped significantly.6 However, yieldco structures are a small source of funding for NextEra and for utilities in general, so again we feel the negative reaction was unnecessary. Indeed, the company reported results weeks after this which showed record renewables bookings and strong returns in 2023.7

In the wake of these problems, we believe the market overreacted. If you disentangle the company-specific issues from the industry fundamentals, headwinds and tailwinds, it confirms our positive view on the near- and long-term prospects of the energy transition and the opportunities we see in selective names.

Industry fundamentals: headwinds and tailwinds

Why exactly did the market take such a negative view across the whole utilities and renewables space? We believe there was a lack of appreciation of some of the risks in offshore in particular, as well as a lack of knowledge of the levers the industry has to offset these challenges and appreciation of the differences across renewables and networks.

There are four main headwinds that became acute last year: high interest rates and hence higher cost of capital; high inflation and hence higher development costs; grid bottlenecks; and supply chain challenges.

There are also four levers the industry use to offset these challenges: higher power and renewables prices ; falling input costs; US Inflation Reduction Act (IRA) tax credits; and strong growth of renewables.

So although renewable costs are higher, solar and onshore were able to pass on those cost through higher prices –. around 50% in the US and 70% in EU8, a trend that has been confirmed by companies in their Q4 results.

The other important dynamic is that renewables costs are starting a downward trend. Over the past two years there has been a notable increase in input costs, but over the past year we have seen prices coming down. So, cost deflation is underway.

On top of this, a final robust dynamic is the growth of clean energy. Markets assumed these headwinds would lead to a slowdown in renewables projects, which has not been the case. The IEA reports that global installation of renewable capacity accelerated by a record 50% in 2023 despite rising capital and input costs. As a result, the IEA has revised up its global renewables forecast for this year by 33%.9

Investment conclusions

As long-term investors we navigate short-term swings. We use our intense and deep research to understand all the moving parts and see short-term setbacks as potential investment opportunities. From this analysis, we believe the market took an overly pessimistic view on the renewables sector in 2023 – a broad-brush approach that didn’t appreciate the industry’s secular tailwinds or differentiate between players. Thus, our investment thesis on the energy transition has not changed. We still see positive and strong growth, albeit not without hurdles in terms of slow permitting, supply chain challenges and growing grid bottlenecks and connection queues.

In this regard, with respect to utilities we favourably view vertically integrated names and networks, and those with capital discipline, strong balance sheets and diversified portfolios that were caught up in the market overreaction and oversold. We expect the growing realisation of the critical need to invest in the grid to accommodate renewables penetration and electrification demand to drive further expansion in network capex, so we also see opportunities in industrials names with attractive exposures to grid upgrading and modernisation, and/or are solutions providers of electrical infrastructure and energy efficiency.

Our overarching conclusions on the clean energy theme were:

  • The energy transition is a long structural theme that will continue to be bumpy, not linear, and will bring winners and losers.
  • The past couple of years have been more complicated with lots of moving parts – macro, policies, geopolitics – but our intense research and ability to step back and see the big picture, dig deep into a theme, the wider industry and stock specifics, and being close to companies’ management has helped us manage this period well with regards to investments in this space: avoiding pain in 2022, outperforming in 2023 and being well positioned into 2024

As we get into this year, we will pay close attention to the impact of declining power prices, as well as the implications of election risks as uncertainty about these could weigh on the theme. It remains an exciting time for the sector.

7 February 2024
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Investment conclusions from 2023’s clean energy sell-off

1Mention of specific stocks is not a recommendation to buy or sell
2Orsted, Offshore wind energy, 2024
3BloombergNEF, New York Hits Offshore Wind Reset, But at a Steep Price,, January 2024
4Bloomberg NEF, UK Ramps Up Wind Farm Support to Revive Crisis-Hit Industry, 16 November 2023
5NextEra Energy, Renewable Energy, 2023
6Investopedia, NextEra Energy Subsidiary Cuts Distribution Growth Outlook and Shares Sink, 27 September 2023
7NextEra, Quarterly Earnings 2023, October 2023
8Bernstein, Renewables Infrastructure: 5 reasons why the sector can still work in a higher for longer rate environment, 10 October 2023
9IEA Renewables Market Report, 2023

Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

 

Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Risks are enhanced for emerging market issuers.

 

The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed reflect those of the respective contributing parties are as of the date given, may change as market or other conditions change and the parties disclaim any responsibility to update such views, and views expressed herein may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. The views expressed are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict, so actual outcomes and results may differ significantly from the views expressed. This information may not be relied upon as an indication of trading intent on behalf of any fund, other investment product or strategy, is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.

 

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is an advertising document. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the USA: Investment products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC.

 

In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

 

Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Risks are enhanced for emerging market issuers.

 

The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed reflect those of the respective contributing parties are as of the date given, may change as market or other conditions change and the parties disclaim any responsibility to update such views, and views expressed herein may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. The views expressed are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict, so actual outcomes and results may differ significantly from the views expressed. This information may not be relied upon as an indication of trading intent on behalf of any fund, other investment product or strategy, is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.

 

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is an advertising document. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the USA: Investment products offered through Columbia Management Investment Distributors, Inc., member FINRA. Advisory services provided by Columbia Management Investment Advisers, LLC.

 

In the UK: Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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