Aegon AM: Accelerating renewables

Aegon AM: Accelerating renewables

October 6, 2023

Energy Transition
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Renewable energy stocks have experienced a sharp sell-off. Fossil fuel companies have been underperforming primarily due to rising interest rates.

The S&P Global Clean Energy Index, comprising of 100 major solar, wind, and renewable energy firms, has fallen by 20.2% in the past two months, putting it on track for its worst annual performance since 2013. Analysts suggest that renewable companies' business models may not suit a high inflation, high interest-rate environment.

In Aegon AM’s recently published Macroeconomic Outlook, Portfolio Manager at Aegon AM, Jacob Vijverberg looks at the renewable energy sector, acknowledging the setbacks and pointing out that the transition will indeed likely be slow. For example, the world uses approximately 160,000 TWh of energy per year, of which only around 8,000 TWh is produced with renewable sources. Despite this, certain developments point a more positive picture for the long-term:

  • Contrary to expectations, the Eurozone did not plunge into a deep recession. Several factors contributed to this resilience: gas demand was reduced through energy-saving measures, new LNG import facilities were constructed, industrial companies were better able to cope than expected, and government interventions like energy price caps and subsidies.
  • Europe's RePowerEU program aims to end reliance on Russian fossil fuels through energy savings, diversification of energy sources, and the rapid expansion of renewable energy. While the targets are ambitious, the direction toward renewable energy is clear.
  • In contrast, the United States, a net energy exporter, introduced the "Inflation Reduction Act" to decarbonize its economy, boosting renewable infrastructure investment.
  • China, despite its substantial coal reliance, has also accelerated the deployment of non-fossil energy sources, becoming a global leader in solar and wind energy production

Finally, Vijverberg points to some economic implications of the energy transition:

'Firstly, the trade balance should improve due to a lower need for fossil fuel imports. The economic multiplier of such an improvement is uncertain but is likely higher than 1 as resources can be spent more productively in domestic sectors. Secondly, inflation will likely be more stable as fossil fuel energy price shocks have a lower impact. Thirdly, the transition will require more domestic labour and investments. This would be positive for growth, but it also risks fuelling even more wage growth due to an already tight labour market in some regions. Lastly, fossil energy exporters are likely to capture a lower part of the world economic pie and have a smaller geopolitical cloud.'

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