The perfect storm kills solar and wind power

The perfect storm kills solar and wind power

Wind power and solar companies can't really complain. Since the Russian attack on Ukraine, politicians have been pressing ahead with the energy transition and business is booming. But these key industries, of all things, are in a deep crisis. Siemens Energy is just the latest example.

Anyone who expected the energy crisis to bring wind power and solar companies a boom and rising share prices on the stock market was very much mistaken. The coalition government has massively accelerated the expansion of renewable energies following the Russian attack on Ukraine. Companies are experiencing an unprecedented boom and their order books are full to bursting. Nevertheless, they are struggling to make money. The increased demand is proving to be a shot in the arm: New projects are expensive, debts are overwhelming and company shares are proving to be a drag on many portfolios this year.

"The share performance in the solar and wind sector is devastating," summarizes ntv stock market reporter Frank Meyer. SolarEdge and Enphase Energy from the solar sector have each lost around 70 percent since the beginning of the year. The Danish wind farm giant Orsted has lost over 50 percent and Vestas Wind Systems just under 14 percent. The shares in this sector are generally a long way from their all-time highs. The corresponding index funds - which bundle securities thematically in order to minimize the risks of individual companies - are also experiencing a dry spell. The S&P Global Clean Energy ETF and the iShares Global Clean Energy ETF, for example, have slumped by more than 30 percent since January.

The core problem is high interest rates and volatile costs. Companies cannot pass everything on to their customers. Supply chain problems, but also overcapacity and a ruinous price war are doing the rest. SolarEdge slipped into the red in the third quarter because sales collapsed. Wind farm operator Orsted suffered almost four billion euros in write-downs and a loss of 2.7 billion euros as a result of two offshore projects in the USA falling through. Vestas, the world's largest turbine manufacturer, surprised everyone at the beginning of the month with black figures for the third quarter. But the competition for higher prices is tough. Turbines require large investments, not only in development, but also for the plants. Until an order is completed, companies have to make financial advances for years.

High costs, high interest rates, overcapacity

Crash landings in a boom phase are the result. In this difficult situation, quality defects at the Spanish subsidiary Gamesa ultimately proved fatal for Siemens Energy. A 7.5 billion euro guarantee from the German government and a complicated rescue plan are keeping the company afloat for the time being, but the cocktail of problems remains: The situation at Wind is "very serious", said Joe Kaeser, Chairman of the Supervisory Board of Siemens Energy, recently in an interview with "Welt am Sonntag". The entire industry is making horrendous losses. It is a young industry that has not yet been consolidated.

"The cost of capital has risen everywhere due to the rapid turnaround in interest rates," says Meyer. "Long approval procedures make projects uncertain in terms of time and make them even more expensive." The price war in the solar and wind sector is brutal: orders are being shifted to China for cost reasons. At the same time, Beijing itself is pushing ahead with the expansion of renewable energies at full speed, and companies from outside the industry also want a slice of the green cake and are flooding the global market with cheap solar components. A year ago, one manager described the plight of the wind power sector as a "rat race". A note in the half-year report of Longi Green Energy Technology, one of the largest Chinese solar companies, from August does not bode well: "The entire industry is on the verge of a knockout round," quotes the Wall Street Journal.

After years in which one crisis followed another, there is a threat of a knockout blow: "At the time when the inflation wave began, these companies were hit very hard by both steel and semiconductor inflation," the business portal Business Insider quotes Martin Frandsen, portfolio manager at Principal Asset Management. "Just when you start to catch up and can breathe again, interest rate hikes come along". That's what you call a perfect storm.

"Zero interest rates are crucial"

For the situation to ease, the turnaround in interest rates is essential, says ntv stock market expert Meyer. "These business models can only survive with zero interest rates because of their low margins," he warns. This also applies to the hydrogen industry.

So will Siemens Energy set a precedent? Does the state have to help the industry with major energy projects if political goals are to be achieved? NordLB CEO Jörg Frischholz says yes. "It is necessary for the state to support major projects, major capacity expansion and major individual projects," he told Capital. However, this is not about cash, but about additional safeguards or default guarantees.

"The scope of what we have jointly undertaken as an economy is about cleverly dovetailing all the building blocks," he explains - and predicts that if there is no aid, many potential investors in the sector will shy away from the risks. Philipp Godron from the think tank and lobby organization Agora Energiewende, on the other hand, is calling for the faltering wind power sector to face up to the competition, as he says in an interview with Capital. "If individual companies experience problems, this is not good for competition and expansion. But that doesn't mean that there isn't a market of manufacturers who can meet the growing demand. Competition closes the supply gap."

For investors looking to invest in the renewable energy sector, this offers little guidance. "There have been good and bad years," says financial advisor Annika Peters in an interview with ntv. "2019 and 2020 were good, we saw a very strong performance in the sector and on the stock market. But in the last three years, companies have struggled." But every trend topic is a risk. That's why it should only ever be an admixture.

Despite the increased demand and accelerated expansion of renewable energies in response to the Ukraine crisis, companies in the solar and wind sectors are struggling financially. High costs, interest rates, and overcapacity are contributing to this challenging situation, leading to significant losses and poor share performance for many companies in these sectors.

The volatile costs and challenging market conditions, including intense competition and supply chain problems, are putting a strain on the financial performance of solar and wind energy companies. This is particularly true for smaller companies that may not have the resources to weather these difficult conditions, as seen with Siemens Energy's subsidiary Gamesa.

Source: www.ntv.de