Green Utilities Are Proving a Safe Haven in Market Rout
(Bloomberg) -- Europe’s green energy companies are emerging as shelter for investors in market fallout from the coronavirus.
Utilities in the region are holding up better than other industries in the health crisis. While the Stoxx 600 Index of European shares fell 21% since the start of the year, the utilities component of that measure has declined only 14%. Within that, renewable power producers are outperforming their less green rivals.
The trend is most clear in Europe, where renewables developers rely on power purchase agreements and feed-in tariffs for the electricity they sell. Those deals have left the greener utilities insulated from the slump in power prices that followed lockdowns in major markets.
The best performers are the greenest utilities including the Danish offshore wind developer Orsted A/S along with Italy’s Enel SpA and Energias de Portugal SA. Others more dependent on wholesale power prices include Centrica Plc, Engie SA and Electricite de France SA, each of which has scaled back dividends and withdrawing earnings guidance because of the jolt from the virus.
“When we run scenarios around the impact of Covid-19, we find that networks and renewables segments are largely insulated,” Deepa Venkateswaran, a managing director at Sanford C. Bernstein & Co. LLC. “We see the long-term renewables growth trends unchanged. For integrated and power price exposed companies, market reactions are in line with our deeply depressed worst-case estimates.”
The trend is most pronounced in Europe, where the strategies of energy companies are more clearly defined. In China, many companies that rely on coal also have large renewables units.
In the U.S., both traditional and green energy companies have suffered. That’s because investors often lean on companies’ growth prospects to determine how to trade them, and the outlook for installations and power demand is bleak.
In Europe, electricity from low-carbon sources has priority feeding into the grid -- and getting payments -- over other types of generation. That means a cut in consumption won’t mean fewer operating hours for clean energy plans as it does for fossil fuel or nuclear units.
“In the most affected markets, the crisis has led to a decline in the demand for power,” Orsted said in a statement last month. “So far, power demand in our core markets is much less affected, and we cannot detect any changed pattern in the occurrence of negative wholesale power prices.”
For utilities that are exposed to the power price like Verbund AG, Vattenfall AB, Fortum Oyj, or have a customer-facing business like Centrica Plc, the situation is much more difficult although difficult to quantify. As big buyers of hedges, those companies may be protected from big swings in the market.
Centrica said it expects to see an increase in customers unable to pay their bills as unemployment rises and household incomes drop. It canceled its dividend and scrapped bonuses for managers earlier this month.
The impact of coronavirus has been “more pronounced than expected,” Engie said on April 1.
“The moves by governments to try to cancel dividends is bad as it increases political risks,” said Tancrede Fulop, analyst at Morningstar Investment Service. “It’s a negative signal for the industry.”
There could be more dividend cuts to come. Large, multinational, diversified companies “may be tempted to withhold cash during these uncertain times,” said Pierre Veyret, global asset analyst at Activtrades Plc. “This could lead these companies to temporarily reduce or cancel their dividends payments while other smaller caps, less exposed, would be more likely to keep on paying investors.”
Like renewables, grid operators and power distributors are largely protected from the impact of virus but wouldn’t escape a recession.
National Grid Plc has made cautious comments about the impact of the virus on its dividend, and SSE Plc has said that the timetable of its payouts probably will be affected.
The biggest downside risks for renewables will not be dividend cuts but impacts on growth as the spread of the coronavirus disrupts supply chains and investment plans worldwide. BloombergNEF and Wood Mackenzie Ltd. have both revised down their forecasts for how much wind will be installed in 2020.
“As we have already seen with some U.K. offshore wind farms, construction is being delayed,” said Pierre Georges, senior director at S&P Global Ratings. “Companies already have tight margins due to competition, so impacts on growth will be negative.”
The pandemic and subsequent economic downturn “will marginally delay the renewable energy transition, but it will not be knocked off course,” analysts including John Musk at RBC Europe Ltd said. “Project delays may occur due to supply-chain disruption, but equally there could be positives as renewables operators may even see reduced competition in bids by more challenged and leveraged players.
©2020 Bloomberg L.P.