Morningstar’s latest Utilities Landscape report revealing trends in the renewable energy industry, shows that renewable energy is growing rapidly in Europe.
Falling costs for wind and solar energy projects along with high renewable ambitions and countries’ support have led to a jump in investment during the last decade, Morningstar reports , but although growing faster, solar will not overtake wind by 2030.
“Renewable energy now accounts for 45% of Europe’s electricity generation, equaling thermal power for the first time in 2023. As solar continues to outpace wind, and grid investments surge to an estimated €584 billion by 2030, Europe is solidifying its position as a leader in the transition to cleaner energy, despite challenges like infrastructure delays and volatile energy markets,” says Tancrede Fulop, Senior Equity Analyst
Providing key takeaways from the report, Fulop says:
• We expect renewables to continue to boom in Europe.
• Electric grid investments to boom by 2030 in the EU: Grid investments have lagged renewables installations for many years resulting in costly congestion issues and connection queues for renewables and data centers. The European commission launched an action plan for grids in November 2023, calling for EUR 584 billion of investments by 2030, or EUR 83 billion annually, nearly double the average annual investments of the past five years.
• Utilities typically offer attractive yields: Since 2020, the premium shrank in the wake of rising yield. At 1.6%, the current premium is below the 2.1% historical median since 2004. We expect the correlation between utilities’ dividend yield and government bond yields to persist.
• Renewable share has surged in Europe: Renewables including hydro dominate in Europe with 45% of power generation in 2023, up from 14% in 2005. The share of decarbonised power generation that is renewables and nuclear has increased from 44% in 2005 to 67% in 2023 as the surge in wind and solar capacity largely offset the decline in nuclear power generation attributable to Germany.
• Profitability and returns: European utilities have been trading significantly below the median since 2022, largely due to underperformance driven by rising interest rates.
• We forecast power prices to normalise in the wake of gas of CO2 allowances price. We project a midcycle coal-to-gas switch price of EUR 33, twice as low as the current price.
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