Is Global Renewable Energy Resistant to Oil Prices?
Why Renewable Energy Is Becoming Oil-Resistant
Crude oil prices pushed below $30 per barrel in early 2016, but that hasn’t stopped the global renewable energy sector from marching forward. In 2015, the sector took in a record $330 billion worth of investments and added 121 gigawatts of capacity. These investments came on the heels of falling solar panel and wind turbine prices and new offshore wind farm projects in the financing stage of development, according to a Bloomberg analysis.
For clean energy investors, 2015 was a volatile year that ended near even-money. The iShares Global Clean Energy ETF (NYSE ARCA: ICLN) briefly rose more than 30% before ending the year up just 0.92% compared to the S&P 500 SPDR’s (NYSE ARCA: SPY) -2.18% loss. While lower solar panel prices boosted investment in the sector, solar panel manufacturers – especially in China – had trouble paying off high debts with dwindling revenue.
These dynamics paint an interesting picture for an industry that is dramatically reshaping the global energy landscape – a scene international investors should watch closely.
Supply & Demand
Solar panel prices have been dramatically falling over the past several years due to a combination of oversupply and falling prices. Between 2011 and 2014, prices fell from $1.31 per watt to around $0.50 per watt thanks to lower processing costs, falling polysilicon costs, and improvements in conversion efficiencies.
These dynamics were exacerbated by an oversupply among Chinese producers early on during the solar boom.
The demand side of the equation is largely dependent on government subsidies, although lower costs are mitigating these impacts. In China, the government spent $110.5 billion on renewable energy in 2015, while India bumped its investment by 23% to $10.9 billion.
The U.S. has remained fairly consistent with its investment of $56 billion, making it the second largest investor in renewable energy after China’s massive investment.
International investors looking to participate in the renewable energy industry should be selective in doing so. With falling solar prices, many low-cost manufacturers are struggling to increase revenue with the same level of demand growth. Many Chinese manufacturers with high debt loads were forced into a liquidity crisis as they were unable to service the debt with lower top-line revenue and pressure on their profit margins.
The real winners have been renewable energy installation companies that have benefited from rising investments, although even this sector struggled throughout the later half of 2015 along with the global economy. In addition, companies that are more on the technological side of the industry – rather than the manufacturing side – are well positioned to benefit from the ongoing innovations in the industry that are likely to continue for the foreseeable future.
Risks to Consider
The renewable energy sector is not without its risks. Despite lower costs, there’s still a heavy reliance on government subsidies to finance large-scale renewable energy projects, such as the U.K.’s record spending on wind farms in 2015.
Germany’s cutbacks on subsidies, for example, led to a slowdown in renewable energy spending in European end markets. These are important risk factors to watch for those who hold large positions in the solar or wind industries.
Investors should also keep a close eye on the fundamentals of companies operating in the space. While China’s solar industry looked unstoppable a few years ago, heavy debt loads led to liquidations in many large companies in more recent years. Investors should seek out high-quality companies with manageable debt levels and robust profit margins.
Key Takeaway Points
- Crude oil prices have fallen below $30 per barrel in early 2016, but that hasn’t stopped renewable energy from attracting investment.
- Clean energy stocks narrowly outperformed the S&P 500 in 2015, but equities haven’t improved as much as investment in the sector.
- International investors should carefully select opportunities in the space given the uneven nature of the industry moving forward.