Is new energy old news?


Is new energy old news?

Despite robust fundamentals, new energy stocks have fallen in value over the past year along with other growth stocks. The decline has been due, in large part, to monetary policy tightening.

Meanwhile, strength in hydrocarbon prices − driven initially by supply chain issues and now amplified by the horrific conflict in Ukraine − have propelled the share prices of traditional energy stocks. 

 

The turnaround in share price performance of traditional energy has been stark over the past year: 

 

Old-vs-new-energy-chart.jpg

Source:Factset

 

What does this mean for the energy transition? 

In the short-term there could potentially be incremental investment in fossil fuels. However, we believe the spike in hydrocarbon prices will accelerate the long-term transition to clean energy as governments and companies seek a secure and stable source of energy. 

 

In fact the fundamental picture for new energy is very encouraging; a few of our clean energy holdings have shown impressive strategic progress and operational delivery, which highlights that new energy is far from old news. Here’s a few examples:

 

ITM Power

ITM is a leading electrolyser design and manufacturing company. Electrolysers are the core part of the process of creating zero-carbon green hydrogen from water.

 

In response to a “step-change in government and corporate commitments to electrolyser projects”, the company raised capital in October to expand production capacity by 400% from 1 to 5 gigawatts (GWs) per annum. The company’s contract backlog grew by 206% in the 12 months to end of December, and revenues are forecast to grow 385% in this financial year. With the rapid increase and volatility in gas prices, along with the increased cost of carbon in Europe, green hydrogen is currently cost-competitive with carbon-emitting grey hydrogen. Many did not expect this cost equation to happen until the backend of the decade.

 

Shifting perceptions of cost and reliability in gas supply should focus industry and policy makers on accelerating hydrogen adoption. According to the company, just to decarbonise industries that currently use grey hydrogen would require roughly 600GW of electrolyser capacity. There are many other heavy industries green hydrogen could decarbonise in addition to this. ITM is one of the world’s largest producers of electrolysers, with planned production capacity of 5GW.  The scale of the opportunity for the company is immense and the current cost of fossil fuel is accelerating this opportunity.

 

“…where gas is being used, we will switch to hydrogen. This will be a process that will happen faster than many might imagine today, and that will create a bright future for all of us.”  Olaf Scholz, German Chancellor speaking at the White House (February 2022)

 

Alfen

Alfen is a rare ‘pure-play’ exposed to several key areas that are critical to the electrification of transport and power generation in the EU. The company offers essential solutions required to enable energy transition. It’s smart grid solutions help integrate renewable energy generation into the power grid and optimise distribution. Alfen also provides electric vehicle charging and energy storage solutions. 

 

Alfen reported strong results recently, well ahead of market expectations. The company is seeing accelerating demand for its product suite and talks about energy transition gaining ground with strong momentum across all business lines. The company grew revenues at 32% in 2021 and guided to an acceleration in revenue growth to 40% in 2022. 

 

With energy grid modernisation, electric vehicle charging infrastructure and battery storage all still at an early stage, Alfen’s growth prospects are very exciting.

 

Solaredge

Solaredge is a market leading solar invertor technology company. It has invented an intelligent inverter solution that has changed the way power is harvested and managed in a solar photovoltaic system. Solaredge has traditionally focused on the residential market but like many strong mid-cap growth companies it is finding opportunities to expand into adjacent markets such as commercial solar and residential battery storage. 

 

Solaredge grew revenues by 35% in 2021 with revenue growth expected to accelerate to 45% in 2022. Last year’s ‘Net Zero by 2050’ report from the International Energy Agency (IEA) highlighted the scale of opportunity for companies like Solaredge.

 

“Ever-cheaper renewable energy technologies give electricity the edge in the race to zero. Our pathway calls for scaling up solar and wind rapidly this decade, reaching annual additions of 630 gigawatts (GW) of solar photovoltaics (PV) and 390 GW of wind by 2030, four-times the record levels set in 2020. For solar PV, this is equivalent to installing the world’s current largest solar park roughly every day.”  IEA Net Zero by 2050

 

Key takeaways

We recognise macro conditions, geopolitics and investor sentiment can cause huge volatility for share prices in the short term. But we remain focused on the long-term fundamentals, which we believe will win-out in time. The long-term fundamentals for our clean energy holdings are strong and improving, while we are also seeing robust operational delivery and accelerating near-term growth. We are at the early foothills of a global energy revolution, which will drive significant value accretion for many clean energy investments.

 

Note: We hold positions in ITM Power, Alfen and Solaredge in our portfolios.


More about the authors

Malcolm McPartlin Investment Manager

Malcolm McPartlin is an investment manager in the Equity team, with responsibility for co-managing our Global Sustainable Equity and UK Equity Absolute Return strategies.



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