At the end of March, share prices were recovering and it looked as if the global economy had escaped a double-dip depression, but most markets peaked in April and all have lost significant value since.
- Sovereign debt concerns across Europe and the US have restricted growth forecasts.
- The renewables-based NEX index has dropped 43% since March
- The HSBC Climate Change index, though not as badly hit because it includes a greater numberof Asia-based companies, still lost 28%.
In the six months to April, Brent crude oil prices rose significantly, but the more recent economic slowdown and slowing demand leveled prices at around US$115 (€85) per barrel.
Increasing fossil-fuel prices generally lead to renewables becoming more competitive in the medium term. However, our research suggests that an increase in oil prices to over about US$90 (€66) can produce an increased short-term risk of financial incentives for renewables being reduced or withdrawn. This is because greater competitiveness with fossil fuels and governments’ desire to avoid high power prices can lead to fuel poverty for some households.
The level of flotations over Q3 demonstrate the harsh trading conditions. Ernst & Young’s Q3 Global Initial Public Offering update shows the total value of IPOs down 57% compared with Q2 (and 46% lower than Q3 2010), and the volume of deals down 26% from Q2 (and 6% from Q3 2010).
The uncertain economic climate has significantly affected investor confidence and renewable companies’ share prices.
The graph shows relative share prices for an aggregation of companies in particular sectors, with a baseline of end June 2007, pre-credit crunch.
- Most noticeable is the sharp decline in the solar sector in the last six months, but also a decline in the wind sector.
- The Eurozone and US debt crisis, reduced government support and increased competition from Asian manufacturers, have caused a perfect storm, most noticeable across solar and wind manufacturers, where a price reduction is not matched by reductions in raw materials, leading to squeezed margins or even losses.
- Several companies have announced profit warnings while others, like Solyndra, Evergreen Solar, and Spectrawatt, have filed for bankruptcy.
Demand has, however, remained relatively strong in US and European solar markets, with capacity possibly doubling this year in the US compared with last, and Italian installations booming. European and US policy will need to provide attractive FITs and grants into 2012 to avert severe setbacks though.
Volatility in finance markets, nuclear power concerns and government pressures are even affecting traditionally defensive stocks, such as the “Big six” European utilities: EDF, EON, RWE, Iberdrola, Centrica and SSE.
With equity markets subdued, utilities need to raise capital from credit markets, but this can affect credit ratings. An article in the May 2011 CAI (2.9Mb) explained how credit ratings for all Europe’s top utilities have fallen steadily for a decade, mostly due to a major expansion in investment.
Utilities clearly have a vital role in funding renewable energy in a capital constrained world, and may need to restore investor confidence to attract further equity capital.