“Undoubtedly, the past years have presented challenges for renewable energy investors. The iShares Global Clean Energy ETF, which includes around 100 renewable energy stocks, is down c. 35% since the start of 2023. The sector has also suffered from a perfect but temporary storm of dramatic interest rate hikes by central banks making the capital-intensive green projects relatively less attractive compared to now higher-yielding bonds with a similar cash flow profile, and a surge in production and material inflation, squeezing profitability. Unlike other sectors where companies can pass on rising costs to end customers, the renewable sector tends to have electricity prices agreed years into the future, Jakob Westh Christensen, Market Analyst at eToro, said.
However, the renewable sector is down, not out. Positive signs are finally starting to emerge. The sector is set to benefit from lower interest rates, solid structural demand, and improved profitability. Structural tailwinds indicate continued staunch support for renewable energy. The International Energy Agency (IEA) expects global investment in renewable energy to reach 2 trillion dollars this year, a c. 65% increase since 2020 and almost double that of fossil fuels. To achieve net-zero carbon emissions by 2050, renewable energy investments will need to more than double to 4.3 trillion dollars annually by 2030.
Sector profitability is improving, with production and material inflation fading and governments stepping up to support the green transition. With valuations now down, renewable energy stocks have the potential for a better 2024 and beyond. However, as this is still a new and evolving sector, it is crucial to have patience and spread our exposure across multiple companies and types of renewable energy solutions.”
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