In the coming decades, the International Energy Agency (IEA) expects the demand for electricity to increase by around 2% per year. This means a doubling in the requirement between now and 2050. This growth will be driven by worldwide economic growth and the electrification of transport and industrial processes. The market for renewable energy will grow much quicker – in the coming 10 years by around 10% per year – because fossil energy sources will be largely replaced by renewable energy sources by 2050.
Source: BNEF New Energy Outlook
The expansion in the supply side will largely come from (offshore) wind energy and solar energy. These two energy sources are Co2-neutral (no CO2 emissions from energy production) and deliver cheaper electricity than those using fossil energy sources.
Many businesses are capitalising on the growth of renewable energy. Here are the few big players focussing exclusively on the production of renewable energy:
Key players in Europe
Ørsted and EDP Renováveis are two of the most important, listed companies. As well as a huge bank of ‘green’ power stations, the other playersoften also have a substantial ‘legacy portfolio’(including coal, gas power stations, and nuclear power plants) andare often also active in the operation of electricity networks. The latter are usually referred to as ‘integrated players’. The operation of an electricity network is heavily regulated and is characterised by stable incomes and limited growth.
Last year, shares in businesses active in renewable energy performed exceptionally well. This was thanks to the ambitious climate plans of various governments(including Europe and the US) and the substantial flow of investors’ money into shares and funds involving the corresponding companies. This year, the shares from these companies have come under pressure. There are various reasons for this. Investors are becoming concerned about increasing competition.
The market for renewable energy is a growth market and that attracts competition. Large oil companies are increasingly competing with electricity companies because they are coming under pressure to be more sustainable and are seeking new sources of income now that the oil market has probably peaked. Also, the increase in long-term interest rates is causing headaches for investors in renewable energy. Many utility companies pay out attractive dividends in combination with pretty high debt levels. This latter element is not usually a problem because the majority of the income for most electricity companies is reasonably stable.We have set out a few of the most important players in the European sector below.
European players with worldwide presence
Ørsted is the biggest player in offshore wind energy and is also active in onshore wind energy and solar, to a lesser extent. The big challenge for the business is not losing too much market share. This means that the company must constantly win high numbers of concessions for new projects, which then generate sufficient returns.
The German RWE is the global number 2 in offshore wind energy. The company invests 1.5 to 2 billion euros every year in renewable energy and has a pipeline of new projects with an overall capacity of over 20 Gigawatt (GW). RWE, however, also operates many lignite and coal power stations(this makes sense because Germany is closing all its nuclear power plants), so the company has been added to the exclusion list for the Norwegian pension fund.
The Italian Enel is an integrated electricity company with activities in over 30 countries. The group draws around 44% of its profits from Networks, 18% from Retail, 26% from renewable energy and 12% from conventional energy sources. The group is principally active in Europe and America. For the coming 10 years, Enel is forecasting annual growth of its net profits by 6-7% per year. In the coming 3 years, Enel wants to increase its dividend annually by an average of 7% to EUR 0.43 per share. Enel’s debt level is slightly lower (EUR 49 billion, net financial debt/EBITDA 2.7) than its direct rivals. Enel is not on the exclusion list of the Norwegian Pension fund but is on their ‘observation list’. We assume that Enel will be taken off this list because the company will close all its coal-fired power stations by 2027 and simultaneously triple its renewable energy capacity by 2030.
The Spanish Iberdrola is an integrated electricity company. The group is a world leader in renewable energy sources (32 GW capacity + a pipeline of >70 GW, very low emissions per kWh versus competitors). Iberdrola operates no coal-fired power stations and has limited participation in nuclear energy (5.7% of the installed capacity, 14.9% of overall energy production). Of its income, around 24% comes from renewable energy sources, 52% from networks and 24% from Generation and Retail. The group is principally active in Europe, the UK, US and Brazil. Iberdrola expects to grow around 6-7% annually until 2025. In terms of dividend, the directors are planning a payout ratio of 65-75% and a minimum dividend of EUR 0.4 per share (EUR 0.44 from 2023). Iberdrola has a great deal of debt (net financial debt of EUR 38 billion, net financial debt/EBITDA 3.5), but approximately 75% of its income is recurrent.
The Portuguese EDP (Energias de Portugal) is an integrated electricity company. Of the EDP’s EBITDA, around 60% comes from renewable energy (principally wind energy and hydroelectric power stations), 25% from Networks and 15% from Retail and Energy Management. By 2030, the company aims to add over 50 gigawatts in renewable energy capacity. The group is principally active in Europe and the Americas. The ratio of net financial debt/EBITDA was 3.2 as of the end of 2020. For the period 2020-2025, EDP aims to realise annual growth in profits of 8%, a minimum dividend of EUR 0.19 per share and a payout ratio of 75-85%. EDP is not on the exclusion list of the Norwegian Pension fund but is on their ‘observation list’. We assume that EDP will be taken off this list because the company will run-down/close all its coal-fired power stations by 2025 and only produce renewable energy (now 74%) by 2030.
EDP Renováveis is the listed subsidiary of EDP, which covers all activities in renewable energy. The free float amounts to just 17%, as 83% of the company is in the hands of EDP. EDP Renováveis is the world number 3 in wind energy. The company generates around half its profits from North America, a quarter from Spain, 12% from Portugal and the balance from the rest of Europe and Brazil. At the end of 2020, the net financial debt of EDP Renovaveis amounted to approximately EUR 3.4 billion (net financial debt/EBITDA around 2.7). In the period 2018-2022, EDP Renováveis aims to increase its annual profits by 11%. EDP Renovaveis pays out only a limited part of its profits in dividends.