Industry Insight: The EU Green Deal & Renewables

By: Mark Nelson


The economic impact of the ongoing coronavirus crisis has been, and will continue to be, significant. Many of the world’s major economies are experiencing their sharpest contractions in several decades and, rather than the austerity measures that followed the global financial crisis, governments are pledging to support the recovery through expansionary fiscal policies.

The current crisis has followed a period in which the environment and climate change have been high on the agendas of policymakers around the world, and therefore there is an expectation that fiscal spending in order to support economic growth may be targeted at measures that will contribute towards decarbonising the global economy.

The world continues to get hotter – according to data from NASA’s Goddard Institute for Space Studies, 19 of the 20 hottest years on record occurred in the two decades from 2000 to 2019 and rising temperatures have coincided with increases in atmospheric CO2 concentration and incidences of weather-related natural disasters. Policies to tackle climate change are no longer seen as nice to have, but as essential to counter the environmental risk to financial and economic stability. Mark Carney, former Bank of England Governor and now the UN Special Envoy for Climate Action and Finance, has urged governments and businesses to see COVID-19 as an opportunity to take decisive action on climate change, warning that it poses a threat from which “we can’t self-isolate”. A recent Ipsos-MORI poll found that 71% of participants from around the world felt that climate change is as serious a crisis as COVID-19.

The European Green Deal is a set of policy initiatives that were announced by the European Union before the coronavirus outbreak, but which have grown in relevance since. The deal is a roadmap for making the EU’s economy sustainable and its overarching goal is to achieve carbon neutrality by 2050. The plan covers a broad range of policy areas including clean energy, the creation of sustainable food systems, sustainable agriculture, and cleaner construction. At least €1tn in sustainable investments are expected to be mobilised over the next decade from both the public and private sectors, boosting employment and the European economy.

While the deal is broad in its scope, at the heart of the plan is the power sector. The power sector contributes to around 30% of Europe’s greenhouse gas emissions, so it is crucial in targeting a net zero economy that it is decarbonised. However, it will also play a key role in decarbonising other areas of the economy, such as transportation. If the entire car fleet of the future is to be electrified then it is important that that clean power sources are used, not coal or any other polluting fossil fuel.

Significant progress has already been made in decarbonising the power sector, particularly in Europe. The installed capacity of renewable energy sources has seen strong growth in the past two decades, driven largely by solar and wind (both onshore and offshore) technologies. Several European countries no longer have coal in their energy mix. The UK recently went over two months without using coal to produce electricity, when a decade ago it accounted for roughly 40% of generation.

However, we expect continued strong growth in renewable capacity in the coming decades so that Europe, and indeed other regions of the world are able to achieve net zero targets. Solar PV and wind power are increasingly the cheapest source of electricity in many markets and according to the International Renewable Energy Agency (IRENA), the share of renewables in global electricity generation needs to increase from 26% in 2018, to 86% in 2050, to achieve the Paris target of restricting global warming to well below 2˚C.

Our two preferred ways to invest in this long-term theme are through the shares of Orsted and SSE. Orsted is the world leader in the development, construction, and operation of offshore wind farms. Offshore wind capacity remains relatively small compared to onshore wind, but it is expected to grow significantly, with the International Energy Agency estimating that it could become a $1tn industry in the coming decades. Orsted has an outstanding track record of securing capacity in offshore wind auctions and of delivering projects on time and within budget. In what is becoming an increasingly competitive sector, it is this track record and its unrivalled specialism in offshore wind that provides us with confidence that the company has a competitive advantage over other players in the space.

SSE is an integrated utility company with operations across the UK and Ireland. While the company has a relatively broad range of businesses, its focus, or what it describes as its core, is its networks business and the renewables division. The company’s success in the UK’s offshore wind CfD auction is potentially transformational for the company’s Renewables division. SSE secured subsidy support for 2.25GW of offshore wind projects, almost four times the size of its existing installed capacity and in addition to our expectations that the projects will prove value accretive for shareholders, we also believe that it puts the company in a strong position to win future capacity. We also consider SSE to be a potential takeover candidate, particularly by an oil major as it would provide a potential suitor with a strong foothold in two business that will be central to decarbonisation efforts – renewables and networks.

Should you have any questions about anything raised in this article, please don’t hesitate to contact us via email, or on 0207 337 0777.

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This note has been produced by Killik & Co on the basis of publicly available information, and all sources are believed to be reliable, but we have not independently verified such information and we do not give any warranty as to its accuracy. Some of the stocks mentioned in this note are covered by Killik & Co’s Equity Research team and others are not. The mentioning of the stocks does not represent a recommendation to buy or sell any securities, and the note is intended as a marketing communication rather than research. This note does not purport to be a complete description of the securities, markets or developments referred to in the material. All expressions of opinion are subject to change without notice. Nothing in this note should be construed as investment advice or as comment on the suitability of any investment or investment service.  Prospective investors should take advice from a professional adviser before making any investment decisions. There are risks with almost every investment that you may not get back the original capital invested. The value of your investments may fall as well as rise and the past performance of investments is not a guide to future performance.