For the first time in 25 years, demand for electricity will grow and accelerate. A turning point for the renewable energy industry, but also for the suppliers in the chain that makes it up. Finding affordable energy quickly will become a challenge. Renewable energies (and natural gas) should take the lead ” because of their cost-competitiveness and rapid availability. ” With valuations historically low, even very low, and a mega trend, Pictet AM is applauding and betting on this niche.
According to historian Jean-Baptiste Fressoz, over time, the main energy resources have replaced each other to a greater or lesser extent. Wood, humanity’s first energy source, was eventually replaced by coal, which was essential to the industrial revolution, and by oil and gas, which dominated the 20th and 21st centuries. Today, nuclear power and renewable energies seem to be gaining ground, and seem to be the inevitable outcome of this succession.
The climate wall, which continues to rise, was one of the first factors to support the move towards clean energy. Health has also entered the debate,” adds Xavier Chollet, Senior Investment Manager at Pictet AM, “with the figure of seven million people dying every year from pollution caused by coal and oil. Unlike other energy transitions in our history, today’s clean energy transition is fuelled by the pressure of a climate emergency.
In the space of three years, a megatrend has come into its own that will drive up demand for renewable energy.
2022, the turning point
It was initially fuelled by geopolitical tensions. The invasion of Ukraine in 2022 reinforced the need for energy sovereignty. Artificial intelligence, whose growth has accelerated with the emergence of ChatGpt in November 2022, will substantially increase demand for electricity.
Driven by the development of artificial intelligence (AI), data centres have spread across the planet, albeit unevenly, with 85% of them currently concentrated in Europe, China and the United States. With the development of artificial intelligence, the energy appetite of these machines will more than double by 2030, according to a report by the International Energy Agency (IEA) published this year. In a single year, these data centres alone will consume as much electricity as Japan, or 3% of the world’s energy. A challenge! The authors of this report emphasise that this is an urgent energy issue, and one of the least understood today, in addition to the climate emergency.
As a result, demand for electricity will accelerate, fuelled by the voracity of data centres, a resurgence in manufacturing (robotics, cooling, etc.) and a favourable demographic situation.
And the explosion in sales of electric vehicles, which has been slightly less dynamic in the Western world in recent months but not in China (up by 5 million in the first half of the year), combined with the accelerated development of recharging infrastructures, will continue to help stimulate electricity consumption, which is set to grow by more than 2% a year, compared with stagnation or an increase of just 0.5% since 2000. In real terms, each year, the annual volume of new electricity generation must be multiplied by four (from 0.5% to more than 2%). Small in percentage terms…but huge in terms of volume.
Find quickly and cheaply
Finding enough energy quickly and at a reasonable price is going to be a challenge. Even though Donald Trump has his eye on coal and oil and has signed decrees to boost extraction in the United States. There are few ways of controlling this strong growth and trying to curb the use of fossil fuels, which are the source of our problems.
Surprisingly, however, the continued support for the development of renewable energies in the United States has maintained the appeal of renewable energies.
Shortage of gas turbines
Theoretically, renewable energies and natural gas should take the lead ” because of their cost-competitiveness and availability in key markets. But with one major caveat for gas. Delivery times for a new gas turbine can be considerable, explains XavierChollet : For example, in the United States, for a new natural gas-fired power plant project launched today, the typical timeframe is 2029 for delivery of the gas turbines and at least 2030 for commissioning of the plant. These timescales could be as long as seven years, due to growing demand, particularly for these data centres.
Given this urgency, the Pictet AM specialist notes that renewable energies offer a twofold advantage in the choice of energy production. They are a winner in terms of cost and deployment time, which has become an important factor.
Wind and solar power stand out. For example, compared with nuclear power, onshore wind turbines cost four times less to produce per megawatt hour (MWh). Above all, in terms of construction and commissioning, onshore wind power takes less than two years to produce, compared with a decade or so to build a nuclear power station. It takes even less time to get a solar power plant up and running, but the MWH produced is still a tad more expensive, despite the fact that the price of solar panels has plummeted and they are still easy to install. The United States can no longer ignore it.
Offshore wind power remains a solution, but it takes slightly longer to bring on stream and is more expensive than onshore, while remaining more attractive than gas.
While in 2007 more than half of the Pictet Clean Energy Transition fund was devoted to renewable energy stocks, by 31 August this year the proportion had shrunk to around twenty percent. “The approach is holistic, with investments along the entire value chain, such as in semi-conductors. But rigorously, based on fundamentals and valuations, and avoiding unproven business models and unprofitable pockets,” explains the fund manager.
A clearly undervalued sector
With their solid fundamentals, the main stocks in the Pictet Clean Energy fund are clearly undervalued compared with the rest of the market, despite the sector’s promise of growth. For example, FCF/Sales (free cash flow on sales, a measure of a company’s cash generation) is 24% for the ‘top 10’ in the portfolio compared with 11% for the S&p500, RoE (return on equity) is 30% compared with 19%, the annual growth rate is faster (18% compared with 10%) and the average price/earnings ratio is 18 compared with 20 for the S&P500.
Faced with electricity-hungry technological AI, Iberdrola, one of the ten largest holdings in the Pictet Clean Energy fund, is an energy company whose production has been rising year on year. The meeting is fatal and benefits the Spanish producer with its available and competitive low-carbon electricity. Over the last 18 months, the share price has risen by around 50%, but remains attractive.
The expansion of data centres will continue to drive up electricity demand. This consumption is set to rise further, making data centres a real driver of electricity growth, as are the demands of semiconductor manufacturing and battery production.
