Renewable Energy

Pastures Not so Green

  • Why it matters

    Why it matters

    Growth has stalled, but renewable energy is seen as the future. Investors must be careful where they put their money.

  • Facts

    Facts

    • In the wake of Fukushima, the German government passed laws that will shut down all nuclear power plants by 2022.
    • Shares in Germany’s top three energy groups – E.ON, RWE and EnBW – lost an average 56 percent, or €50 billion in combined market value, in the wake of this decision.
    • The companies have filed lawsuits against the government, claiming more than €24 billion related to Merkel’s nuclear policy, which they claim is unfair and has robbed them of one of their main profit centers overnight.
  • Audio

    Audio

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Windkraft in der Eifel
In the renewable energy sector, the grass isn’t always green. Source: Oliver Berg/DPA.

Lego has built a 7.5-meter high wind farm made out of 146,000 Lego blocks. With its record-breaking facility, the Danish toymaker did not just seek more attention. The company also sought to drive home the message that, after investing in two offshore wind parks, it now gets 100 percent of its energy from renewable sources.

Lego isn’t the only firm that has discovered the appeal of renewable energy. Many other companies believe this young sector is the energy market of the future, and many experts rank it as an attractive area for investments.

It’s not hard to see why. Global demand for energy is increasing steadily. British Petroleum predicts it will jump by 30 percent by 2035. In addition, the realization that fossil fuels won’t last forever and the looming consequences of climate change have made regenerative energy increasingly important. The German government wants 45 percent of the country’s electricity supply to be from green energies by 2025.

For investors, this sound like there’s a lot of easy money to be made in that sector. But in Germany, the sector may be young and full of potential, but it’s also vulnerable to crises.

“The worst on the stock exchanges is over and share prices are clearly undervalued.”

Thomas Retzlaff, Chief executive of Hallertauer Investment Management

Take solar companies for example. The bankruptcy of the largest German solar technology manufacturer, Solarworld, last month demonstrated that investors should look twice before buying stakes in renewable energy companies. Many solar companies around the world are falling behind their Chinese competitors. Just recently, Chinese company Jinkosolar, the global leader in the manufacture of solar cells, announced it will be involved in the world’s largest photo-voltaic facility in Saudi Arabia. Labor costs are so low at these Chinese companies, that they can offer much lower production costs than those of their western competitors.

But it’s not just western solar companies that are losing ground. Germany’s energy producers have not been so kind to investors either. After the Fukushima nuclear disaster in 2011, Berlin decided to shift to renewable energy. This sudden change in policy hit German energy companies hard and drove their share prices down. This led the giant German energy producer RWE to spin off its renewable energy business into a new subsidiary, Innogy. Germany’s other energy giant, E. ON, chose the opposite approach: It divested its traditional energy supply business into a new spin-off, Uniper, and retained green energy.

Investment experts believe, however, that energy companies have survived the worst of it, after billions in write-downs. “The worst on the stock exchanges is over and share prices are clearly undervalued,” said Thomas Retzlaff from Hallertauer Investment Management. E.ON shares have jumped over 20 percent since the start of this year and while Innogy stockholders have enjoyed a 9-percent rise in their investment.

01 p32 Shares in Focus-01

New bidding requirements introduced this year for applying for government subsidies are currently changing the competitive environment on the renewable energy sector in Germany. In the past, green energy facilities were subsidized with between 8 and 12 cents per kilowatt-hour. Today, the necessary capacities on renewable energy are first determined, and then auctioned off to the companies. “The new bidding process has created potential for lowering costs over the mid and long-terms,” said Jochen Homann, chairman of the German Federal Grid Agency. As a result, the prices for solar modules and wind turbines have fallen during the last few years, and with them the need for subsidies as well.

The rise of renewable energies is also changing the power grid itself. So-called “smart grids” are now gathering electricity from energy producers and ensuring efficient distribution of it. These intelligent grids calculate consumption and demand by themselves, and funnel the power to where it’s needed. To further develop this technology, IT expertise is needed.

“The overall situation in the energy sector is too difficult and too politicized for sustained investment”

Thomas Retzlaff, Chief executive of Hallertauer Investment Management

Data management is playing an increasingly important role here. “Digitalization and big data are hot topics right now for the energy sector,” said Andreas Stender, energy expert at A.T. Kearney Consultants. This affects private households as well. E.ON pulled in a partnership with Google to bring the Sunroof project to Germany. German customers can now calculate the solar potential of the area where they live.

Investors can also profit from the trend in this sector to mergers and acquisitions. According to a study from consultancy Price Waterhouse Coopers, the value represented by all mergers and takeovers on the energy sector soared by 47 percent in 2016 year-on-year, to $293 billion. Just recently, investors had their eye on Siemens too. The Munich-based company merged its wind power business division with the Spanish company Gamesa. RWE is supposedly mulling selling its shares in Innogy to the French energy producer Engie as well.

Nevertheless, investing in renewable energy companies remains risky. “The overall situation in the energy sector is too difficult and too politicized for sustained investment,” said Mr. Retzlaff. But not even this can stop the shift to green energy. “Despite everything, the importance of renewable energies will continue to grow, and with it intelligent power grids, primarily due to climate protection goals,” said Nektarios Kessidis, an expert with Deutsche Asset Management.

 

Sarah Doll reports for Handelsblatt from Düsseldorf.

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