ABGSC on the Renewable Energy sector: “We will see a lot of M&A in the market”

The index provider MSCI recently came out and said that the field for renewable energy stocks is as crowded as technology stocks were before the dotcom boom. Ofelia Aspemyr, Equity Researcher at ABG Sundal Collier, gives her view on the latest sector trends and what investors should look out for:
“There is a lot of capital going into the sector right now. I think that, at the moment, investors are trying to educate themselves as much as possible, asking lots of questions and really trying to figure out who the winners will be. Similar to other sectors, investors should search for companies that create business opportunities through innovative structures, such as co-operations and other such business models. Most renewable energy companies offer an asset management (service and maintenance) component, which enables a wider span for passive investors to efficiently own and optimise returns from the asset. One can also argue that crowded markets often undergo steep learning curves which usually decreases the technology costs. However, companies need to differentiate themselves from one another. Here is also where the opportunities crystallise – identifying the business characteristics that are most likely to be long-term winners.”
In a landmark court case the other week, a Dutch court ordered Royal Dutch Shell to cut its emissions. In your mind, what’s the knock-on effect for renewable companies?
“The fact that many energy-producing companies are implementing net-zero targets is favourable for renewable companies. For the energy-producers, there are not many alternatives to achieve their targets other than to add renewables to their portfolios. As such, we will likely see more and more partnerships between renewable companies and energy producers. Many of the non-renewable energy-producing companies lack the essential knowledge about renewable operations, meaning that renewable companies most likely will continue to develop projects as well as provide a service offering and asset management capability, while the energy-producers continue to focus on their main operations.”
Technology and innovation are everything when it comes to renewables. But technology can be costly, and that means that scalability is key to any company’s bottom line.
Do bigger, longer-established players have an advantage in terms of scalability?
“Yes, the value chain is an important factor and longer-established players have better know-how, in general. Most players in the renewables sector focus on a limited geographical area, one specific technology, or one specific part of the value chain. Building expertise along the entire value chain or across a broader scope of geographies and technologies increases revenue opportunities. Additionally, by mixing solar, wind and hydro in the same portfolio the output volatility will be reduced. Further, larger players often have lower earnings volatility, since they likely have several ongoing projects rather than just a few, and thus warrant a premium.”
What’s the big take away, then?
“I think we will see a lot of M&A in the market, since the benefits of operating as a larger player in this sector are many – I think that players are likely to consolidate positions across the value chain. Further, project acquisitions can help companies to gain scale in new markets quickly, gain access to talented personnel, provide expertise and act as entry points into new regions. When it comes to renewable energy, determining the most economic option is very site-specific. Output is also volatile, since it is nature and weather-dependent. We therefore expect to see an increased focus on the balancing of different forms of power generation, where storage capacity will be a key consideration due to the volatility. We expect production prices in the renewable sector to continue to decrease –in line with learning rates and higher efficiency from increased scale, larger deployed turbines, and strong input sources.”
Aspemyr also points out that non-renewable energy sources are moving in the opposite direction (coal, for example, has low learning rates), with rising costs of production. And looking to the future, she suggests that:
“As the renewable penetration of the grid increases, green hydrogen could be a potential solution for grid balancing, given its potential to act as a seasonal storage of fuel. In the wind sector, we will likely see increased expansion into offshore, thanks to its high capacity and deployment potential.”
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