The past couple of years have been very difficult for investors in renewable energy companies. The sector has suffered from poor sentiment due to the upswing in interest rates, which has hurt valuations. However, the underlying attractions of renewable energy are, I believe, better than ever.
Growth in renewable energy looks set to continue its rapid upward trajectory as governments around the world get serious about their obligations to reduce carbon emissions and tackle climate change. Major buyers of power, such as the multinational global technology companies, also have an important role to play. Many of these firms no longer see it as acceptable to power their growth with electricity generated by fossil fuels. Crucially, these are creditworthy counterparties with deep pockets.
Demand for electricity in developed markets, which has been falling for several years as we have become more efficient, now looks set to increase, a consequence of new uses for electricity, such as transportation and potentially large-scale hydrogen production. New sources of demand, such as artificial intelligence and data centres, could provide a further boost. The combination of a recent poor performance and an improving fundamental outlook has given rise to many attractive investment opportunities, particularly for those investors willing to look beyond the traditional leaders in the sector.
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Renewable energy funds that are profiting from growth
RWE (Frankfurt: RWE) is a company that many people still consider to be a traditional utility, but while it does continue to operate some legacy coal assets, a timetable for closure for these has been agreed with the German government. RWE now firmly sees itself as being a renewable and low-carbon energy company. Its US renewables business should be one of the key beneficiaries of the growth in demand for power from data centres in North America, and it recently signed 15-year power sales agreements with Microsoft for two new Texas wind farms that are currently under construction. Furthermore, it is one of the major players in the fast-growing global offshore wind market, having managed to avoid some of the difficulties that have dogged other participants in that sector.
Another company profiting from the growth of the technology sector’s demand for power is Greencoat Renewables (LSE: GRP), which has signed a 10-year sales contract to supply power to a data centre in Ireland. This company is less well known than its stablemate, Greencoat UK Wind, but it benefits from the fact that many of its assets come with fixed contracts, in contrast to its more market-exposed big brother. Irish wind farms comprise 60% of the portfolio, with the remainder located in Germany, France, Spain and the Nordics. Like many other renewable energy investment companies, it trades at a meaningful discount to its published net asset value (NAV).
A fund that services the green revolution
Many investors advocate “pick and shovel” investing: buying the companies that supply a service to a sector rather than the sector itself. Cadeler (Oslo: CADLR), which owns and operates wind turbine installation vessels, is a good example. Cadeler is benefiting from a shortage of the very large vessels capable of installing the new generation of offshore wind turbines. With four vessels already on the water and another seven to be delivered over the next four years, Cadeler is the established market leader.
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