The Iranian market is a catalyst and a slowdown for the European green energy race
Investors are wary of the market volatility and interest rate hikes expected in the future, as well as the slow permitting process. The 'war in Iran' and its associated surge in fossil fuel prices has prompted some politicians to push for more renewable energy. Nearly a month after the conflict in the Middle East that caused the "largest energy market disruption ever", countries that rely on oil and gas imports are looking for alternatives and scaling up green energy.
The longer-term changes are more obvious, but the short-term picture is still mixed. While crude oil and gas prices have risen by more than 50% since the beginning of the war in February, inflation and interest rates expectations continue to rise.
"There is a renewables paradox at work," said Luca Moro. Chief investment officer of energy transition fund SpesX. Higher power prices increase earnings, but higher capital costs "can undermine project economics".
RENEWABLE ENERGY DISCOUNT NARROWS? FOR SOME
Financial markets expect two to three rate increases by the European Central Bank this year and two by Bank of England.
This is evident in the'market pricing, where listed renewable energy infrastructure fund trade at a 40.8% average discount to their net assets value. This discount has decreased slightly but not uniformly for all companies over the last month.
Winterflood's data shows that Greencoat UK Wind is trading at a discount of 26.5%, Renewables Infrastructure Group at 36.3% and Foresight Solar at 38.8%. NextEnergy Solar trades for 47.3%.
Funds focused on battery storage and energy efficiency trade at a discount of 36.8% and 52.1% respectively.
After an initial drop, the Solactive European Green Deal Selection Index has recovered, but is still down 5.8% for the month. This is in line with the roughly 5% drop in the MSCI World Index.
A EU Grid Package that aims to accelerate projects as well as plans from the European Investment Bank for 75 billion euros ($87billion) more in clean energy financing will also provide long-term support.
The length of the Iran Conflict will determine the direction. According to Jonathan Waghorn, fund manager at Guinness, the duration of the Iran Conflict is crucial for determining the future of the market. Iran rejected the negotiations on Wednesday to end this war.
As a result, "we see higher European electricity and gas prices." If this is a long-term problem, it will clearly incentivise renewable energy supply.
Refinancing renewable projects may be necessary if their initial terms were based on lower interest rates.
Wood Mackenzie's research on the U.S. Market found that if interest rates increased by 2%, lifetime costs of electricity production from new renewable projects could increase by 20%.
Tony Dalwood said that while a higher capital cost could affect the valuation of existing assets, new projects will "be priced accordingly", and reflect increased financing costs.
CAN PERMITTING GET QUICKER? How quickly the EU allows new projects to proceed will determine how successful they are in scaling up renewables, which is already a top priority due to the Ukraine conflict. The EU wants to end talks by the year's end to accelerate the pace of approving grids, renewables and storage, as well as recharging stations.
SolarPower Europe, a trade group, conducted an analysis in July last year that said "permitting delays can be as much as four years." In February of this year, a report from Wind Europe's peer group said that permitting in the majority of the EU was slowing down.
James Janoskey said that the biggest unlock was faster and more predictable permitting, especially for grid upgrades and tie-ins. This would expand the pipeline of investable capital and support reliable, affordable energy for new loads.
(source: Reuters)
