Edmond de Rothschild Megatrends | Energy Transition

The prospects for the development of alternative energies remain significant. The International Energy Agency is predicting a considerable increase in demand for electricity between now and 2030.

In Europe alone, electricity could account for more than 50% of primary energy by the end of the decade (compared with around 28% today), which calls for the major development of renewable energies. Despite this outlook, selected shares, particularly those of wind power companies, have fallen sharply since mid-2023. This is due to a change in the outlook for project profitability: value creation for independent developers is based on a guaranteed stable long-term price and controlled financing costs.

Rising interest rates are increasing the cost of capital for independent suppliers. In terms of selling prices, large integrated companies such as utilities have strong cash flows ensuring lower financing costs, enabling them to offer more competitive tender prices than independent suppliers in wind projects. In the longer term, the risk of a downward revision of guaranteed electricity prices in contracts is possible in many cases, which would call into question the profitability of the investments made.

If the energy transition is not called into question, investors should favour other vehicles for exposure to this megatrend rather than pure renewable energy providers, in particular large groups investing in these transition projects through their cash flow, as well as groups active in energy savings, home renovation, electric transformers, electric vehicles, hydrogen, or the replacement of energy-intensive production equipment, which are already benefiting from established programmes.

Edmond de Rothschild CIO Office – December 2023