James Smith, manager of the Premier Miton Global Renewables Trust considers the factors that could influence the performance of renewable energy companies in 2025.
Economic backdrop
Recent performance of renewable and clean energy companies has been poor. I believe this has been mainly a result of a combination of economic and political factors, rather than anything fundamentally wrong with renewable energy companies themselves. Indeed, most companies within the Trust’s portfolio, with some exceptions, have performed well, increasing their earnings, and continuing to grow their businesses.
I believe there will be five key determinants of the renewable energy sector’s performance. in 2025; politics, economics, power prices, growth, and lastly, market sentiment.
Politics
I expect European governments to continue to prioritise renewable energy, and I am not expecting to see any significant policy changes. With Europe being reliant on imported energy, security of supply remains an issue, brought into focus by the continuing conflict in Ukraine. Further, Europe’s reliance on imported Liquified Natural Gas (LNG) is costly, and results in relatively high electricity prices. The renewables sector is seen as being an important tool to address both issues.
The UK government is aiming for a carbon free electricity system by 2030, which will necessitate a step up in investment levels if it is to be achieved. We believe that policy should remain favourable.
It will be interesting to see how much of Donald Trump’s rhetoric regarding renewable energy translates into policy changes. However, demand for power in the US remains high, and large corporate buyers of power will continue to demand carbon free power irrespective of any policy changes at a federal level. Offshore wind is thought to be in a more vulnerable position than on-shore, given its higher cost and the President Elect’s hostility toward it.
Economics
2024 was supposed to be the year in which inflation would be tamed and interest rates would be reduced substantially. We have seen some positive news on inflation, but economic activity has generally been strong, particularly in the US. While central banks have now commenced cutting rates, this has come later than originally expected, and the path of future cuts is expected to be shallower.
Further, yields on government bonds have not fallen as expected, and in fact have risen strongly over recent months. Bond markets are concerned about the scale of government debt issuance, and the possible inflationary impacts of government policy, particularly in the US and the UK.
The performance of the renewable energy sector has been highly (negatively) correlated to bond yields. When yields on government debt have been increasing, the sector has been weak and vice versa. While 2025 should see a further softening of inflation, and interest rate cuts, there are many variables which could influence this either way, and this will likely continue to be a major determinant of the sector’s performance.
Power prices
While European power prices have normalised from the exceptional levels seen in 2022 and 2023, they remain high by historical standards; a result of Europe’s reliance on imported LNG which has replaced cheaper piped natural gas from Russia. Power prices have been strong in the second half of 2024, although the market does not seem to have given this much weight in the performance of share prices.
The majority of the sector’s revenues accrue from long term power price sales contracts or Government tariffs, however several companies retain market exposure, and the power price environment remains important. The potential impact of the Trump presidency on the war in Ukraine could play a part in the path of power pricing in 2025, as will any recovery in the Chinese economy.
Growth
Renewable energy companies operate in a growing sector, and we believe that growth should continue to be strong. Over the five years from 2019 to 2023, renewable energy production has increased by almost 75% on a global basis*. I expect this to continue.
The renewable developers owned within the Trust’s portfolio have substantial asset pipelines, and operational assets will continue to grow. This should drive earnings growth, and many companies have said they expect returns on new projects to be higher than in the past on a combination of falling equipment costs (particularly solar and batteries), increased scale (larger projects, bigger turbines), and a healthy power price environment.
Underlying growth in 2024 was offset by the normalisation of power prices for many companies, with markets failing to give much credit for the expanding asset bases. With power prices now seemingly having reached a bottom, we feel the sector growth should return to being a positive performance factor in 2025.
Market sentiment
Of course, market sentiment toward the sector is influenced by all the above factors. However, sentiment in 2024 seems to have been irrationally poor. For instance, the market sees sector growth as a negative for many companies, implicitly assuming that companies destroy shareholder value when investing in new assets, despite investment returns in the sector being generally healthy and on an improving trend in some cases. As a result, the potential value creation from future growth is, in many cases, “in for free”.
Another example would be the market selling down renewable energy companies on higher bond yields, but the market seemingly ignoring the offsetting positive effects of inflation on many companies (with bond yields simply reflecting the higher inflation). This has been particularly the case for the UK renewable investment company sector, which now trades at a substantial discount to asset value, from a premium historically.
*Source: Energy Institute, Statistical Review of World Energy 2024